Exam 7: An Introduction to Portfolio Management

Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?

Exhibit 7.12 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Calculate the expected return for a three asset portfolio with the following

Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio.

Which of the following statements about the correlation coefficient is false?

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)] -Prior to the work of Markowitz in the late 1950's and early 1960's, portfolio managers did not have a well-developed, quantitative means of measuring risk.

Exhibit 7.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.8. 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?

If the covariance of two stocks is positive, these stocks tend to move together over time.

Exhibit 7.4 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.4. What is the standard deviation of this portfolio?

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)] -Refer to Exhibit 7A.1. What weight of security 1 gives the minimum portfolio variance when r_1.2 = .60, E( $\sigma$ ₁) = .10 and E( $\sigma$ ₂) = .16?

Exhibit 7.10 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.10. What is the standard deviation of this portfolio?

Between 1980 and 1990, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.19 and 0.06, respectively, and the covariance of these index returns was 0.0014. What was the correlation coefficient between the two market indicators?

Between 1975 and 1985, the standard deviation of the returns for the NYSE and the S&P 500 indexes were 0.06 and 0.07, respectively, and the covariance of these index returns was 0.0008. What was the correlation coefficient between the two market indicators?

For a two stock portfolio containing Stocks i and j, the correlation coefficient of returns (r_ij) is equal to the square root of the covariance (cov_ij).

The expected return and standard deviation of a portfolio of risky assets is equal to the weighted average of the individual asset's expected returns and standard deviation.

What is the expected return of the three stock portfolio described below?

If equal risk is added moving along the envelope curve containing the best possible combinations the return will

Exhibit 7.16 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Based on the economic outlook for the industry a financial analyst covering Top Choice Corporation has determined the following three possible returns given three different states of the economy over the next period. -Refer to Exhibit 7.16. What is the expected return for Top Choice Corporation?

The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement together.

Exhibit 7.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.9. 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?

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 expected return of the stock A and B portfolio?