Exam 8: Risk, Return, and Portfolio Theory

For the following efficient frontier, the standard deviation of the minimum variance portfolio is:

Given the following forecasts, what is the correlation between securities X and Y?

The geometric average quarterly return of ROM Company was 5.0% for the previous year.What was the return for the third quarter if the returns for the first, second, and fourth quarters were 10.0%, -9.05%, and 8.0%, respectively?

Use the following two statements to answer this question: I.Risk is the possibility of incurring harm. II.Ex post returns are expected returns while ex ante returns are future returns.

The standard deviation and expected returns for 4 portfolios (A, B, C, and D)are graphed on the following efficient frontier: Which of the following portfolios (or combinations)are likely to be preferred by a risk-averse investor? Which of the following portfolios (or combinations)are likely to be preferred by a risk-loving investor? Explain your reasoning.

AMC Corp had a geometric weekly return of 5.0% for this past week.The daily returns for Monday through Thursday are 4.0%, 3.0%, -7.0%, and 9.0%, respectively.If AMC's stock traded at $16.22 when the market closed on Friday, what is the opening price of the stock on Friday?

Suppose you plan to create a portfolio with three securities: Dizzy (D), Lazy (L), and Crazy (C).The expected returns for Dizzy, Lazy and Crazy are 6.0%, 8.0%, and 10.0%, respectively.The standard deviation is 9.0% for Dizzy, 15.0% for Lazy, and 12.0% for Crazy.The correlation coefficients among the returns for the three securities are: CORRDL= 0.6, CORRDC = -0.3, and CORRLC = 0.4.What is the portfolio standard deviation if 30.0% of the portfolio is in Dizzy and 10.0% is in Lazy?

Laura purchased a share of MVP Company for $26.43 one year ago.The stock paid a quarterly dividend of $0.50 during the year.What is the capital gain yield if the current stock price is $28.26?

Your portfolio that has $500 invested in Stock A and $1,500 invested in Stock B.If the expected returns on Stock A and Stock B are 7% and 23%, respectively, what is the portfolio return?

What is the expected return from an investment that has an equally likely probability to lose half of the investment or double the investment?

You have been given the following forecasts for the economy and Stock A: (1)the probability of having a recession next year is 30.0%, a normal economy is 55.0%, and an expansion is 15.0%, and (2)the price of Stock A will be $9 if the economy is in recession, $15 if the economy is normal, and $18 if the economy is in expansion.What is the ex ante variance of Stock A's returns if it is currently selling for $12?

Suppose you plan to create a portfolio with two securities: Tobin and Bino, with weights to be greater than or equal to zero.The expected return of Tobin is 10 percent with a standard deviation of 12 percent.The expected return of Bino is 16 percent with a standard deviation of 20 percent.The correlation between the two securities is 0.30. a)What percentage of your investment should be invested in Tobin to obtain a portfolio standard deviation of 12.2638 percent? b)What is the expected return of the portfolio?

What is the expected return for a portfolio that has $800 invested in Stock A and $1,200 invested in Stock B, if the expected returns on Stock A and Stock B are 10% and 18%, respectively?

Suppose you are given the following forecasts for the economy and for Sneezy Company at the beginning of the year: During the year, you observed the following: a)Calculate the ex-ante expected return b)Calculate the ex-ante standard deviation of returns c)Calculate the ex-post average return d)Calculate the ex-post standard deviation of returns

The expected returns for Bumpy Inc.and Bouncy Inc.are 20.0% and 8.0%, respectively.The standard deviation is 35.0% for Bumpy and 16.0% for Bouncy.What is the portfolio standard deviation if 45.0% of the portfolio is in Bumpy and the two securities have perfect negative correlation?

Cinderella plans to form a portfolio with two securities: Jaq and Gus.The correlation between the two securities is -1.Given the following forecasts, what are the weights in Jaq and Gus that will set the standard deviation of the portfolio equal to zero?

Richards & Co.Analysts has recently published a study claiming that the benefits to diversification are constant.In other words, adding one more stock to a three stock portfolio will have the same impact as adding one more stock to a 500‐stock portfolio.You are not convinced and you decide to evaluate the claim. a .Assume that all the stocks have the same standard deviation, 10.0%, and all are independent (correlation equals 0.0).Create equally weighted portfolios of 1 to 10 stocks and calculate the standard deviation for each portfolio.Graph the portfolio standard deviation as a function of the number of stocks.Based on the results of your analysis, evaluate the Richard & Co.Analysts ' claim. b .As the number of firms increases, what do you expect will happen to the risk of the portfolio? Can the risk of the portfolio come close to zero?

Which of the following is not a method of estimating Value at Risk (VaR)?

Given the following forecasts, what is the covariance of the returns on securities A and B?

Given the following forecasts, what is the standard deviation of returns?