Question 1

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

W_X = $1,000/($1,000+$1,500+$2,500)= 0.2,W_Y = $1,500/$5,000 = 0.3,W_Z = 1-0.2-0.3 = 0.5 E(R_P)= 10%*0.2 + 12%*0.3 + 15%*0.5 = 13.10%

Question 2

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?

Accepted Answer

Portfolio weight in A = $800/($800+$1,200),Portfolio weight in B = 1 - 40% = 60%
E(R)= 10%*40% + 18%*60% = 14.80%

Question 3

Suppose you own 100 shares of CyberChase Corporation and 200 shares of NetSurfer Corporation.At the time of purchase,the stocks of CyberChase and NetSurfer were trading at $25 and $15 per share,respectively.What is the expected value of the portfolio if CyberChase has an expected return of 8 percent and NetSurfer has an expected return of 13 percent?

Accepted Answer

Expected value of the portfolio =
$25*100*(1.08)+$15*200*(1.13)=$2,700+$3,390 = $6,090

Question 4

No benefits of diversification with two stocks occur when  is:

Accepted Answer

The coefficient of correlation between the two stocks (11ea8229_348f_a3a8_bbd8_a79f72a9c7aa_TB1726_11) is the determinant of whether diversification benefits exist or not. A coefficient of -1 indicates perfect negative correlation (i.e., the prices of the two stocks move exact opposite of each other) and provides perfect diversification benefits. A coefficient of 1 indicates perfect positive correlation (i.e., the prices of the two stocks move exactly in the same direction) and provides no diversification benefits. A coefficient of 0 indicates no correlation and provides the maximum diversification benefits. In this case, we do not know the coefficient of correlation between the two stocks, but we know that there are no diversification benefits, which means that the coefficient of correlation must be either 1 or very close to 1 (i.e., 0.52 is not a possible answer). Therefore, the best choice is B (1).

Question 5

Use the following three statements to answer this question:

Accepted Answer

The answer of Use the following three statements to answer...

Question 6

Suppose you own a portfolio that has 500 shares of SHC Company and 1,000 shares of MHC Company.The stock prices of SHC and MHC at the time of purchase were $40 and $25 per share,respectively.Given the following forecasts,what is the expected return for the portfolio?

Accepted Answer

E(R_SHC)= 30%*10% + 15%*60% + (-10%)*30% = 9% E(R_MHC)= 20%*10% + 10%*60% + (-5%)*30% = 6.5% w_SHC= ($40*500)/$40*500+$25*100 = $20,000/$45,000 = 0.4444 W_MHC = 1-0.4444 = 0.5556 E(R_P)= 9%*0.4444+6.5%*0.5556 = 7.61%

Question 7

Given the following forecasts,what is the expected return for a portfolio that has $2,200 invested in Stock X,$3,600 in Stock Y,and $4,200 invested in Stock Z?

Accepted Answer

E(R_X)= 25%*35% + 14%*45% + 4%*20% = 15.85% E(R_Y)= (-10%)*35% + 8%*45% + 14%*20% = 2.90% E(R_Z)= 15%*35% + 25%*45% + (-10%)*20% = 14.50% w_X = $2,200/($2,200+$3,600+$4,200)= 0.22 w_Y = $3,600/$10,000 = 0.36 w_Z = $4,200/$10,000 = 0.42 E (R_P)= 15.85%*0.22+2.90%*0.36+14.5%*0.42 = 10.62%

Question 8

Which of the following is a FALSE statement of the correlation coefficient?

Accepted Answer

This statement is false as the closer the absolute value of the correlation coefficient is to one, the stronger the relationship between the returns on the two securities.

Question 9

Use the following three statements to answer this question:

Accepted Answer

The answer of Use the following three statements to answer...

Question 10

Stocks A and B have a correlation of +1.If stock A went from $10 to $12 over the past month,what is the price of stock B,if its price one month ago was $5?

Accepted Answer

Since stocks A and B have a correlation of +1, it means that they move in the same direction. Therefore, if stock A went up from $10 to $12, we can assume that stock B also went up by the same percentage, from $5 to $6. Thus, the answer is C.

Question 11

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

Accepted Answer

Modern portfolio theory shows how to form portfolios with the highest possible expected rate of return for any given level of risk. This is achieved through diversification and the efficient frontier, which identifies the optimal portfolio based on risk and return. Option A is incorrect as the primary goal is to maximize risk-reduction gains, not lower them. Option B is incorrect as investors should aim to avoid being unnecessarily exposed to a single negative event, not to be exposed to it. Option D is incorrect as combining securities into portfolios can actually decrease risk.

Question 12

A portfolio consists of two securities: Nervy and Goofy.The expected return of Nervy is 12 percent with a standard deviation of 15 percent.The expected return of Goofy is 9 percent with a standard deviation of 10 percent.What is the portfolio standard deviation if 35 percent of the portfolio is in Nervy and the two securities have a correlation of 0.6?

Accepted Answer

σ_p = √[(0.35²)(0.15²)+(0.65²)(0.10²)+2(0.35)(0.65)(0.15)(0.10)(0.6)] = 10.52%

Question 13

Given the following forecasts,what is the variance of returns?

Accepted Answer

Variance from above question 37

Question 14

Which of the following is TRUE about diversification?

Accepted Answer

Diversification can reduce portfolio risk, but it cannot eliminate it entirely. Option A is incorrect. A correlation coefficient of 1 implies perfect positive correlation, meaning that the securities move in the same direction, and diversification cannot help in this case. Option B is correct. When the correlation coefficient is -1, the variance can be reduced to zero but not otherwise. Option C is incorrect. When the covariance between two securities is negative, the portfolio's standard deviation can be reduced, but it cannot be reduced to zero. Option D is incorrect.

Question 15

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?

Accepted Answer

0.09(1-x)+12x = 0.1,X = 0.33

Question 16

Which of the following is NOT a correct statement?

Accepted Answer

Portfolios on the upper segment of the minimum variance frontier dominate portfolios that lie above the minimum variance portfolio on the lower segment. Therefore, statement D is not correct.

Question 17

Given the following forecasts,what is the expected return for a portfolio that has $1,500 invested in Stock A and $4,500 invested in Stock B?

Accepted Answer

Portfolio weight in A = $1,500/($1,500+$4,500)= 0.25,Portfolio weight in B = 1 - 0.25 = 0.75 E(R_A)= 25%*20% + 15%*50% + (-5%)*30% = 11% E(R_B)= 35%*20% + 25%*50% + (-15%)*30% = 15% E(R_P)= 11%*0.25 + 15%*0.75 = 14%

Question 18

Use the following two statements to answer this question:

Accepted Answer

The answer of Use the following two statements to answer...

Question 19

Calculate the correlation between the two stocks.

Accepted Answer

Standard deviations are 0.1114 and 0.2,Respectively.
COV = .2(.25-.11)(.35-.15)+.5(.15-.11)(.25-.15)+.3(.-05-.11)(-.15-.15)= 0.022
0.022/(0.1114*0.2)= 0.9874

Question 20

Which of the following statements is FALSE?

Accepted Answer

Risk increases as return increases.

Quiz 8: Risk, return, and Portfolio Theory

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?

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?

No benefits of diversification with two stocks occur when is:

Use the following three statements to answer this question:

Suppose you own a portfolio that has 500 shares of SHC Company and 1,000 shares of MHC Company.The stock prices of SHC and MHC at the time of purchase were $40 and $25 per share,respectively.Given the following forecasts,what is the expected return for the portfolio?

Given the following forecasts,what is the expected return for a portfolio that has $2,200 invested in Stock X,$3,600 in Stock Y,and $4,200 invested in Stock Z?

Which of the following is a FALSE statement of the correlation coefficient?

Use the following three statements to answer this question:

Stocks A and B have a correlation of +1.If stock A went from $10 to $12 over the past month,what is the price of stock B,if its price one month ago was $5?

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

Given the following forecasts,what is the variance of returns?

Which of the following is TRUE about diversification?

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?

Which of the following is NOT a correct statement?

Given the following forecasts,what is the expected return for a portfolio that has $1,500 invested in Stock A and $4,500 invested in Stock B?

Use the following two statements to answer this question:

Calculate the correlation between the two stocks.

Which of the following statements is FALSE?