Exam 8: Risk, return, and Portfolio Theory

The following table shows the closing prices and daily returns of Toronto Skates Inc.over a week: Calculate the weekly geometric and arithmetic returns of Toronto Skates Inc.(your answer should be four decimals,margin of error is +/- 0.0050%)

Sandy paid $47.38 for one share of EMH Company one year ago.The stock paid four quarterly dividends of $1.00 each during the year,and is selling for $49.50 now.What are the income yield and capital gain yield for EMH over the past year?

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 percent,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?

Use the following two statements to answer this question:

AMC Corp had a geometric weekly return of 5% for this past week.The daily returns for Monday through Thursday are 4 percent,3 percent,-7 percent,and 9 percent,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?

In a two-security portfolio,25% is invested in Security A and the remainder in Security B.If the portfolio standard deviation is 12%,and the individual standard deviations for Security A and Security B are 22% and 7%,respectively,what is the covariance of the returns on Securities A and B?

You have done a thorough study of the economy and of Stock X and concluded the following probabilities: having a boom next year is 20 percent,having a stable economy is 55 percent,and having a recession is 25 percent.You have also found the price of Stock X will be: $45 if there is a boom,$25 if the economy is stable,and $15 if there is a recession.What is the ex ante expected return on Stock X if it is currently selling for $24?

Which of the following is NOT a correct statement?

A portfolio is composed of 100 shares (priced at $22/share)of Mensa Corporation and 200 shares of Einstein Corporation (priced at $15/share).What is the expected value of the portfolio if Mensa has an expected return of 14 percent and Einstein has an expected return of 8 percent?

You are contemplating investing in two stocks ABC and XYZ that have an expected return of 12 percent and 9 percent,respectively.If your target expected return is 10 percent,what would be the weight in ABC?

You have observed the following for Montreal Smoked Meat Corporation: What are the arithmetic and geometric average weekly returns over the 6-week period ended June 15,2016?

Suppose you own a two-security portfolio.You have 25 percent of your funds invested in Security A and the balance of your funds invested in Security B.Security A has a standard deviation of 8 percent and Security B has a standard deviation of 12 percent.What is the covariance of the returns on Securities A and B if the portfolio standard deviation is 10 percent?

You have observed the following annual returns for Motherboard Inc.: 25%,15%,-20%,30%,and -15%.What are the variance and standard deviation of returns?

Distinguish between systematic and non-systematic risk.

The capital gain yield of an equity security is 9.27 percent.The security paid a quarterly dividend of $0.55 per share during the year.What is the current price of the security if the total return is 13.76 percent?

Discuss the difference between expected returns using subjective probabilities and expected returns based on historical values.

Which of the following is a TRUE statement of modern portfolio theory?

On January 1,you forecasted that there is a 45 percent chance that the stock price of Edward Bear Inc.will be $95 in one year while there is a 55 percent chance that the stock price will be $35.Six months later,you revised the estimated probability to 25 percent chance of the high state (stock price of $95).If the market agrees with your revised forecasts,what is the expected change in stock price from January 1 to July 1? Assume the discount rate is zero.

Melanie bought a share of MPT Company for $53.98 one year ago.The stock paid a quarterly dividend of $0.52 throughout the year.What is the income yield if the stock is selling for $57.10 today?

Suppose you plan to create a portfolio with two securities: Rolie and Polie.Rolie has an expected return of 6 percent with a standard deviation of 5 percent.Polie has an expected return of 18 percent with a standard deviation of 15 percent.The correlation between the returns of these two securities is perfectly negative.What percentage of your investment should be in Polie to make the portfolio risk free? What would be the expected return on the portfolio?