Question 1

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Accepted Answer

The answer of Use the table for the question(s)below.
Consider the...

Question 2

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

Accepted Answer

The answer of What diversification,if any,is achieved if two stocks...

Question 3

A stock market comprises 1000 shares of stock A and 3000 shares of stock B.The share prices for stocks A and B are $25 and $30,respectively.What is the capitalization of the market portfolio?

Accepted Answer

The market capitalization is calculated by multiplying the number of shares by their respective share prices and summing the results for all stocks in the market. For stock A: 1000 shares * $25 = $25,000. For stock B: 3000 shares * $30 = $90,000. Adding these together gives a total market capitalization of $115,000.

Question 4

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What is the capitalization of the market portfolio?

Accepted Answer

The market capitalization is calculated by multiplying the number of shares by their respective share prices and summing the results for all stocks in the market. For stock A: 5000 shares * $20/share = $100,000. For stock B: 2000 shares * $35/share = $70,000. Adding these together gives a total market capitalization of $170,000.

Question 5

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

Accepted Answer

The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy can be calculated using the formula:
Portfolio Volatility = √[w1^2 x σ1^2 + w2^2 x σ2^2 + 2w1w2ρ12σ1σ2]
where w1 and w2 are weights of Wal-Mart and Duke Energy, respectively, σ1 and σ2 are their volatilities, and ρ12 is their correlation.
Substituting the given values, we get:
Portfolio Volatility = √[(0.5)^2 x (0.15)^2 + (0.5)^2 x (0.10)^2 + 2 x 0.5 x 0.5 x 0.2 x 0.15 x 0.10] = 0.076 or 7.6%
Therefore, the closest option is C) 7.6%.

Question 6

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What proportion of the market portfolio is comprised of stock A?

Accepted Answer

To find the proportion of the market portfolio that is comprised of stock A, we need to calculate the market value of stock A and the market value of the entire portfolio. 
Market value of stock A = 5000 x $20 = $100,000 
Market value of stock B = 2000 x $35 = $70,000 
Market value of entire portfolio = ($100,000 + $70,000) = $170,000
Proportion of the market portfolio comprised of stock A = (Market value of stock A / Market value of entire portfolio) x 100% = ($100,000 / $170,000) x 100% = 58.8%. Therefore, the best choice is A) 58.8%.

Question 7

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.If you have $15,000 to invest and you want to hold the market portfolio,how much of your money will you invest in Stock A?

Accepted Answer

First, we need to calculate the total value of the market portfolio:

Total value = (5000 x $20) + (2000 x $35) = $100,000 + $70,000 = $170,000

To find out how much of our money we should invest in Stock A, we need to calculate the proportion of the total value that corresponds to Stock A:

Proportion of Stock A = (5000 x $20) / $170,000 = 0.58823

Finally, we can use this proportion to calculate how much of our $15,000 to invest in Stock A:

Amount to invest in Stock A = Proportion of Stock A x Total amount to invest = 0.58823 x $15,000 ≈ $8,823.53

Therefore, the best choice is B.

Question 8

Which of the following combinations of stocks would give you the biggest reduction in risk?

Accepted Answer

Diversification of investments is key in reducing risk. By combining stocks from two different industries, there is a lower chance of both stocks being affected by the same market forces. Choosing stocks with low correlation to each other is also important in reducing risk. Option C offers a combination of a technology company (Microsoft) and a utility company (Duke Energy), providing diversification and potentially reducing risk. Options A and B both include Wal-Mart, which is in the same industry as many other retail companies and may not provide significant diversification. Options D and E both only include one stock, offering no diversification.

Question 9

Air Canada stock has a standard deviation of 18%,while the market index standard deviation is 8%.If the correlation between Air Canada and the market index is 0.45,what is the beta of Air Canada stock?

Accepted Answer

The beta of a stock is calculated using the formula: Beta = (Correlation between the stock and the market) * (Standard deviation of the stock / Standard deviation of the market). Plugging in the given values: Beta = 0.45 * (18% / 8%) = 1.0125, which rounds to 1.01.

Question 10

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What proportion of the market portfolio is comprised of each stock?

Accepted Answer

To calculate the proportion of each stock in the market portfolio, we need to calculate the total value of each stock and then divide it by the total value of the portfolio. 
Total value of stock A = 2000 shares x $20/share = $40,000 
Total value of stock B = 2000 shares x $10/share = $20,000 
Total value of portfolio = $40,000 + $20,000 = $60,000 
Proportion of stock A = $40,000/$60,000 = 0.667 or 66.7% 
Proportion of stock B = $20,000/$60,000 = 0.333 or 33.3% 
Therefore, the best choice is A as it correctly shows the proportions of each stock in the market portfolio.

Question 11

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Accepted Answer

To find the volatility of a portfolio with two assets, we use the following formula:

Portfolio Volatility = √(w1^2 x σ1^2 + w2^2 x σ2^2 + 2 x w1 x w2 x ρ x σ1 x σ2)

where:
w1 = weight of asset 1
w2 = weight of asset 2
σ1 = volatility of asset 1
σ2 = volatility of asset 2
ρ = correlation between asset 1 and asset 2

In this case, we are equally invested in Duke Energy and Microsoft, so w1 = 0.5 and w2 = 0.5.

Using the table, we can see that the volatility of Duke Energy is 12%, the volatility of Microsoft is 17%, and the correlation between the two is 0.5.

Plugging in the values, we get:

Portfolio Volatility = √(0.5^2 x 0.12^2 + 0.5^2 x 0.17^2 + 2 x 0.5 x 0.5 x 0.5 x 0.12 x 0.17)
                     = √(0.00576 + 0.014225 + 0.00612)
                     ≈ 0.1174 or 11.74%

Therefore, the answer is B) 9%, which is the closest option.

Question 12

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The expected return of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

Accepted Answer

To find the expected return of a portfolio that is equally invested in Wal-Mart and Duke Energy, we simply take the average of their individual expected returns:
(0.085 + 0.125)/2 = 0.105 or 10.5%
Therefore, the closest answer choice is E) 18.5%, which is not a viable option based on the given data.

Question 13

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The volatility of a portfolio that is consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Accepted Answer

The volatility of the portfolio can be calculated using the formula:
σP=√w1^2σ1^2+w2^2σ2^2+2w1w2ρ12σ1σ2
where,
w1=10,000/(10,000-2,000)=1.25 (since it is a short position for Microsoft, the weight for Microsoft is negative)
w2=-2,000/(10,000-2,000)=-0.25
σ1=16%
σ2=20%
ρ12=0.6
Substituting the values, we get:
σP=√(1.25^2)(16%^2)+(-0.25^2)(20%^2)+2(1.25)(-0.25)(0.6)(16%)(20%)
σP=√(2.28%)
σP=14.4%
Therefore, the closest option is B) 14%.

Question 14

What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

Accepted Answer

The answer of What is the lowest risk possible by...

Question 15

Use the table for the question(s)below.
Consider the following returns:
 
-The volatility on Home Depot's returns is closest to:

Accepted Answer

The answer of Use the table for the question(s)below.
Consider the...

Question 16

Stocks that have a higher volatility will always have a higher beta.

Accepted Answer

Beta measures a stock's volatility relative to the overall market, not in absolute terms. A stock can be highly volatile but have a low beta if its price movements are not correlated with the market.

Question 17

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The expected return of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Accepted Answer

The expected return of the portfolio can be calculated as 
(0.08*10000) - (0.12*2000) = 680
The expected return of the portfolio is $680 or 6.8%.
Therefore, the closest option is D)18%.

Question 18

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What is the capitalization of the market portfolio?

Accepted Answer

The market capitalization is calculated by multiplying the number of shares by their respective share prices and summing the totals for both stocks. For stock A: 2000 shares * $20 = $40,000. For stock B: 2000 shares * $10 = $20,000. Adding these together gives a total market capitalization of $60,000.

Question 19

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The volatility of a portfolio that is equally invested in Wal-Mart and Microsoft is closest to:

Accepted Answer

The answer of Use the table for the question(s)below.
Consider the...

Question 20

If you build a large enough portfolio,you can diversify away all the risks of a portfolio.

Accepted Answer

While diversification can reduce unsystematic risk (specific to individual investments), it cannot eliminate systematic risk, which affects the entire market or a significant portion of it.

Quiz 11: Systematic Risk and the Equity Risk Premium

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

A stock market comprises 1000 shares of stock A and 3000 shares of stock B.The share prices for stocks A and B are $25 and $30,respectively.What is the capitalization of the market portfolio?

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What is the capitalization of the market portfolio?

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What proportion of the market portfolio is comprised of stock A?

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.If you have $15,000 to invest and you want to hold the market portfolio,how much of your money will you invest in Stock A?

Which of the following combinations of stocks would give you the biggest reduction in risk?

Air Canada stock has a standard deviation of 18%,while the market index standard deviation is 8%.If the correlation between Air Canada and the market index is 0.45,what is the beta of Air Canada stock?

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What proportion of the market portfolio is comprised of each stock?

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The expected return of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

Use the table for the question(s) below. Consider the following returns: -The volatility on Home Depot's returns is closest to:

Stocks that have a higher volatility will always have a higher beta.

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The expected return of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What is the capitalization of the market portfolio?

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is equally invested in Wal-Mart and Microsoft is closest to:

If you build a large enough portfolio,you can diversify away all the risks of a portfolio.