Question 1

Define the term "risk" and explain how it is related to the expected return.

Accepted Answer

The answer of Define the term "risk" and explain how...

Question 2

Which of the following statements is TRUE?

Accepted Answer

A) The geometric mean measures the average annual rates of return while the arithmetic mean measures the compound growth rate over multiple time periods. 
B) The more the returns vary, the bigger the difference between the arithmetic and geometric mean will be.The difference is dependent on the relevant investment horizon. 
C) The geometric mean is appropriate when we are trying to estimate the typical return for a given period. 
D) The arithmetic mean is a better average return estimate when we are interested in the rate of return performance of an investment over time.

Question 3

Suppose you plan to create a portfolio with two securities: Rolie and Polie.Rolie has an expected return of 6.0% with a standard deviation of 5.0%.Polie has an expected return of 18.0% with a standard deviation of 15.0%.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?

Accepted Answer

A) Portfolio weight in Polie = 25%; expected return on the portfolio = 9.00% 
B) Portfolio weight in Polie = 40%; expected return on the portfolio = 10.80% 
C) Portfolio weight in Polie = 60%; expected return on the portfolio = 13.20% 
D) Portfolio weight in Polie = 75%; expected return on the portfolio = 15.00%

Question 4

You have observed the following quarterly returns for companies Humpty and Dumpty:

What is the correlation between the returns on the two companies?

Accepted Answer

A) -0.007 
B) -0.333 
C) -0.667 
D) -0.894

Question 5

The efficient frontier is constructed by:

Accepted Answer

A) Maximizing expected portfolio return while holding portfolio variance constant. 
B) Minimizing portfolio variance while holding expected portfolio return constant. 
C) Either A or B 
D) None of the above will generate an efficient frontier.

Question 6

A stock selling for $12.00 today and expected to pay a $1.50 dividend and have a capital gain of 5% in one year will increase in price to sell at:

Accepted Answer

A) $ 13.50 
B) $ 14.10 
C) $ 12.60 
D) $ 15.18

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) All portfolios on the efficient frontier are attainable. 
B) Every portfolio below the efficient portfolio can be improved. 
C) All portfolios on the efficient frontier have the same variance to return ratio. 
D) The minimum variance portfolio represents the lowest level of variance that an efficient portfolio can have.

Question 8

Indiana Jones intends to form a portfolio with two securities: Virtual and Real.Virtual has an expected return of 25.0% with a standard deviation of 5.0%.Real has an expected return of 12.0% with a standard deviation of 16.0%.The correlation between the two securities is 0.2.What is the portfolio standard deviation if the portfolio has an expected return of 20.0%?

Accepted Answer

A) 0.55% 
B) 1.08% 
C) 7.41% 
D) 10.40%

Question 9

What is the correlation between stocks X and Y?

Accepted Answer

A) 0.26 
B) -0.96 
C) 0.96 
D) 0.51

Question 10

The income yield and capital gain yield of a stock are 4.90 percent and 7.37 percent, respectively.The stock paid a quarterly dividend of $0.65 per share during the year.What amount was originally paid for the stock?

Accepted Answer

A) $35.28 
B) $37.01 
C) $53.06 
D) $56.97

Question 11

The closing prices for Stock B from December to June are: $42.90, $44.20, $51.50, $49.60, $45.50, $46.30, and $42.50.What is the standard deviation of returns over the six-month period?

Accepted Answer

A) 0.295% 
B) 0.868% 
C) 5.436% 
D) 9.318%

Question 12

Which of the following is TRUE?

Accepted Answer

A) Large numbers of securities are required to achieve diversification. 
B) Portfolio risk can always be reduced by adding additional securities. 
C) Systematic risk can never be eliminated through diversification. 
D) Non-systematic risk can never be reduced.

Question 13

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?

Accepted Answer

A) 0.91% 
B) 0.96% 
C) 3.85% 
D) 3.64%

Question 14

What is the expected return for a portfolio that has $1,000 invested in Stock X, $1,500 invested in Stock Y, and $2,500 invested in Stock Z, if the expected returns on Stock X, Stock Y, and Stock Z are 10%, 12%, and 15%, respectively?

Accepted Answer

A) 11.90% 
B) 12.00% 
C) 12.50% 
D) 13.10%

Question 15

What is the standard deviation of returns on a stock priced today at $10 that has a 25.0% probability of increasing to $13, a 50.0% probability of increasing to $12, a 15.0% probability of increasing by 5.0%, and a 10.0% probability of decreasing to $ 7?

Accepted Answer

A) 0.0094 
B) 0.0286 
C) 0.0968 
D) 0.1692

Question 16

Christopher Robin purchased 500 shares of Pooh Inc.at $48 per share and 1,000 shares of Piglet Inc.at $35 per share one year ago.Pooh and Piglet paid quarterly dividends of $0.80 and $0.50 per share, respectively, during the year.One year later, he sold both securities at $45 per share.The two securities have a correlation of 0.6, and the standard deviations of Pooh and Piglet are 15 percent and 12 percent, respectively.
a)What fraction of Christopher Robin's portfolio is invested in Pooh? What fraction is invested in Piglet?
b)What are the income yields of Pooh, Piglet, and the portfolio?
c)What are the capital gain yields of Pooh, Piglet, and the portfolio?
d)What are the total returns of Pooh, Piglet, and the portfolio?
e)What is the standard deviation of the portfolio?

Accepted Answer

The answer of Christopher Robin purchased 500 shares of Pooh...

Question 17

No benefits of diversification can occur with two stocks when  is:

Accepted Answer

A) 0 
B) +1 
C) -1 
D) 0.52

Question 18

You have done a thorough study of the economy and of Stock X and concluded the following probabilities:
$\bullet$having a boom next year is 20.0%
$\bullet$having a stable economy is 55.0%
$\bullet$having a recession is 25.0%.
You have also found the price of Stock X will be:
$\bullet$$45 if there is a boom
$\bullet$$25 if the economy is stable
$\bullet$$15 if there is a recession.
What is the ex ante expected return on Stock X if it is currently selling for $24?

Accepted Answer

A) -9.43% 
B) 10.42% 
C) 18.06% 
D) 26.50%

Question 19

What is the correlation between stocks Y and Z?

Accepted Answer

A) 0.96 
B) 0.51 
C) -0.26 
D) 0.26

Question 20

Amazon's new mobile phone 'Fire' spectacularly under-performed analyst expectations leading to a drop in share price.This is an example of:

Accepted Answer

A) Market risk 
B) Non-systematic risk 
C) Standard risk 
D) Systematic risk

Exam 8: Risk, Return, and Portfolio Theory