Exam 7: An Introduction to Portfolio Management

Exhibit 7.10 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.10. 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 slope of the utility curves for a strongly risk-averse investor, relative to the slope of the utility curves for a less risk-averse investor, will

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)] -A good portfolio is a collection of individually good assets.

As the number of risky assets in a portfolio increases, the total risk of the portfolio decreases.

The probability of an adverse outcome is a definition of

Exhibit 7.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.1. 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?

Between 1980 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the two market indicators?

Investors choose a portfolio on the efficient frontier based on their utility functions that reflect their attitudes towards risk.

A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.

A positive relationship between expected return and expected risk is consistent with

The combination of two assets that are completely negatively correlated provides maximum returns.

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

In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would

Between 1986 and 1996, the standard deviation of the returns for the NYSE and the DJIA indexes were 0.10 and 0.09, respectively, and the covariance of these index returns was 0.0009. What was the correlation coefficient between the two market indicators?

Exhibit 7.15 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.15. What is the standard deviation of this portfolio?

Exhibit 7.15 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.15. 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 7.12 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification?

Exhibit 7.12 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.12. Calculate the expected returns and expected standard deviations of a two stock portfolio when r_1,2 = .80 and w₁ = .60.

Exhibit 7.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.7. 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?