Exam 7: An Introduction to Portfolio Management

Exhibit 7.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.6. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation ( $\sigma$ _i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

The optimal portfolio is identified at the point of tangency between the efficient frontier and the

Exhibit 7.14 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed. -What is the standard deviation of an equally weighted portfolio of two stocks with a covariance of 0.009, if the standard deviation of the first stock is 15% and the standard deviation of the second stock is 20%?

Exhibit 7.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.7. What is the standard deviation of this portfolio?

Exhibit 7.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.5. What is the standard deviation of this portfolio?

A portfolio is efficient if no other asset or portfolios offer higher expected return with the same (or lower) risk or lower risk with the same (or higher) expected return.

Exhibit 7.4 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation ( $\sigma$ _i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

Markowitz assumed that, given an expected return, investors prefer to minimize risk.

When individuals evaluate their portfolios they should evaluate

A measure that only considers deviations above the mean is semi-variance.

In a three asset portfolio the standard deviation of the portfolio is one third of the square root of the sum of the individual standard deviations.

Assuming that everyone agrees on the efficient frontier (given a set of costs), there would be consensus that the optimal portfolio on the frontier would be where the ratio of return per unit of risk was greatest.

Exhibit 7.14 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed. -Refer to Exhibit 7.14. What is the standard deviation of the stock A and B portfolio?

The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is not such any assumption?

Exhibit 7.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.2. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation ( $\sigma$ _i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A positive covariance between two variables indicates that

Exhibit 7A.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The general equation for the weight of the first security to achieve the minimum variance (in a two stock portfolio) is given by: W₁ = [E( $\sigma$ ₂)² - r_1.2 E( $\sigma$ ₁)E( $\sigma$ ₂)] /[E( $\sigma$ ₁)² + E( $\sigma$ ₂)² - 2 r_1.2E( $\sigma$ ₁)E( $\sigma$ ₂)] -Risk is defined as the uncertainty of future outcomes.

Exhibit 7.12 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Given the following weights and expected security returns, calculate the expected return for the portfolio.

Exhibit 7.11 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.11. Calculate the expected return of the two stock portfolio.

An individual investor's utility curves specify the tradeoffs he or she is willing to make between