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Chapter 07 An Introduction To Portfolio Management Multiple Choice Question

RALLY & ROSS

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Momenul Islam Mridha Murad
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Chapter 07 An Introduction To Portfolio Management Multiple Choice Question

RALLY & ROSS

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Momenul Islam Mridha Murad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1 2 w3 @4 ws wo (7 ws (9 «10 ou (12 (13 wis AN INTRODUCTION TO PORTFOLIO MANAGEMENT TRUE/FALSE QUESTIONS A good portfolio is acollection of individualls good assets. Risk is defined as the uncertainty of future oukomes. Prior to the work of Markowitz in the late 1650's and early 1960°s, prtfolio managers did not hive a well developed, quantitative means of measuring risk. ‘A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk Markowitz assumec that, given an expected return, investors prefer to minimize risk. ‘The correlation coefficient and the covariance are measures of the extent to which two random variables move together. For a two stock portfolio containing Stocks i and j, the correlation coefficient Of returns (r4) is equal to the square root of the covariance (cov) If the covariance of two stocks is positive, these stocks tend to move together over time. The expected return and standard deviation of a portfolio of risky assets is equal to the weighted average of the individual asset’s expected returns and standard deviation. ‘The combination of two assets that are completely negatively correlated provides maximum returns. Increasirg the correl:tion among assets in a pertfolio results in an increase in the standard deviation of the portfolio. Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio. Ina three asset portfolio the standard deviatior of the portfolio is one third of the square root of thesum of the individual standard deviations. As the number of risky assets in a portfolio increases, the total risk of the portfolio decreases. 15 1 @2 (©) 3 (b) 4 Assuming that everyone agrees on the efficient frontier (given a set of costs), there would be consensus that the optimal portfolio on the frontier would be where the ratio of return per unit of risk was greatest MULTIPLE CHOICE CONCEPT QUESTIONS When individuals evaltate their portfolios they should evaluate a) Alllthe U.S. ané non-U.S. stocks. b) All marketable securities. c) All marketable securities anc other liquid assets. a) Allassets. ¢) —Alllassets and liabilities. ‘The probability of an adverse outcome is a definition of a) Statistics. b) Variance. ©) — andor a) Risk. ©) Semi-variance sbove the mean, ‘The Markowitz model is based on several essumptions regarding investor behavior. Which of the following is not such ary assumption? a) _ Investors consider each investment altemative as being represented by a probability distribution of expectel returns over some holding period. b) Investors maxinize one-period expected utility. ©) Investors estimate the risk of the portfolio on the basis of the variability of ecpected returns. 4) Investors base fecisions solely on expected return and risk. ©) None of the cbove (that is, all are bends out. ©) bendsin. d) approaches a vertical straight line. ©) none of the above. A portfolio manager is considering adding another security to his, portfolio. The correlations of the alternatives available are listed below. Whick security would enable the highest level of risk diversification a) 0.0 bd) 0.25 ) — -0.25 d -0.78 2) 10 ©) with a) b) ° d) e) A positive covariance between two variables indicates thal a) the two variables move in different directions. b) the tvo variables move in the same direction. ©) the two variables are low risk. d) the two variables are high risk. the two variables are risk free. A positive relationship between expected return and expected risk is consistent a) _invesors being risk seekers. b) _ invesors being risk avoiders. ©) invesors being risk averse. —_allofthe above. ©) noneof the above. ‘The slope ofthe efficient frontier is calculated as follows, E(R porto E(Gpontstio) E(Gponi/ ECRyponttio) AE(Rportaio)AE(Gporaio) AE(Gportotio) AE(Rpoxtotiod None of the above (a) 20 The slope of the utility curves fora strongly risk-averse investor, relative to the slope the utility curves for « less risk-averse investor will a) Be steeper. b) Be flatter. ©) Be vertical d) Be horzontal. e) None of the above. MULTIPLE CHOICE PROBLEMS (1 Between 1990 and 2000, the standard deviation of the returns for the NIKKEI and the DITA indexes were 0.18 and 0.16, respectively, and the covatiance of these index returns was 0.003. What was th: correlation coefficient between £7 the two market indicators? a) 96 b) 0.0187 ©) 0.1042 a) 0.0166 ©) 0.343 (2 Between 1994 and 2304, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covatiance of these index returns was 0.03. What was the correlation coefficient between the two market indicators? a) 1.26 b) 0.7937 ©) 0.2142 @d) ONL 0.44 3 od fas @6 Between 1980 and 1930, the standard deviaticn of the returns for the NIKKEI and the DJIA indexes were 0.19 and 0.06, respectively, and the covariance of these index returns was 0.0014. What was the correlation coefficient between the two market indicaiors? a) 81498. by 0.0233 ©) 0.0073 ad) 0.2514 ©) 0.1228 Between 1975 and 1685, the standard deviation of the returns for th: NYSE. and the S&P 500 indexes were 0.06 and 0.07, respectively, and the covariance of these index returrs was 0.0008. What was the correlation coefficient between the two market indicators? a) 1525 by 1388 ©) 1458 a) 1622 ©) 1064 Between 1986 and 1996, the standard deviation of the returns for the NYSE and the DJIA indexes were 0.10 and 0.09, respectively, and the covariance of these index returns was 0.0009. What was the correlation coefficient between the two market indicators? a) .1000 by) 1100 c) 1258 ad) 1322 ©) 1164 Between 1980 and 2(00, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the two market indicators? a 0906 by 0985 ©) 0796 a) 0875 ©) 0654 (7 @s «9 © 10 ‘What is the expected return of the three stock portfolio described belew? Commor Stock Market Value Expected Return ‘Ando Inc. 95,000 12.0% Bee Co. 32,000 8.75% Cool Inc. 65,000 17.7% a) 18.45% by 12.82% ©) 13.38% a) 15.27% ©) 16.67% ‘What is the expected return of the three stock portfolio described below? ‘Commor Stock Market Value Expected Return Xerox 125,000 8% Yelcon 250,000 25% Zwiebal 175,000, 16% a) 18.27% b) 14.33% ©) 16.33% a 12.72% ©) 645% What is the expected return of the three stock portfolio described blow? Common Stock _Market Value _Expecied Return Alko Inc. 25,000 38% Belmont Co. 160,000 10% Cardo Ine. 75,000 16% a) 21.33% b) 12.50% ©) 32.00% d 15.75% ©) 16.80% Whaat is the expected return of the three stock portfolio described below? Common Stock Market Value Expecied Return Delton Ine. 50,000 10% Efley Co. 40,000 11% Grippon Inc. 60,000 15% a 14.89% b) 16.22% ©) 12.66% ad) 13.85% ©) 16.99% wb) @ 13 ‘Whaat is the expected return of the three stock portfolio described below? ‘ommon Stock Market Valu Ex Return Lupko Inc 50,000 13% Mackey Co. 25,000 9% Nippon Inc. 75.000 14% a) 12.04% bd) 12.83% ©) 13.07% d) 15.89% 2) 17.91% ©) 13.75% a 172% ‘ 12% ‘What is tie standard deviation of this portfolio? a) 8.79% b) 13.75% 125% a) 772% 56am USETHE FOLLOWING INFCRMATION FOR THE NEXT TWO PROBLEMS 14 © 15 ” Asset Asset (B) (Ra) = 25% EAR) = 15% 18% 075 (on Wa= COVas What is the expected ‘eturn of a portfolio of two risky assets if the expected return E(R), standard deviation (c;), covariane: (COV,,), and asset weight (W)) are as shown above? a) 18.64% b) 20.0% 2) 28% a 13.65% What is the standard deviation of this portfolio? a) 5.45% b) 18.64% ©) 20.0% a) 22.35% ©) 13.65% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A Assot (B E(Ra) = 9% (on) = 4% Wa=04 COVa1 (a) 16 (b) 17 What is the expected return of a portfolio of two risky assets if the expected return E(Rj), standard deviation (6), covariance (COV;,), and asset weight (W,) are as shown above? a) 8.95% b) 9.30% ° 9.95% d) 10.20% ©) 10.70% What is the stindard deviation of this s0rtfolio? a) 3.68% b) 4.56% ©) 4.99% ad 5.16% ©) 6.02% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS, @ B (ORE) COVA» = 0.0008 What is the expected return of a portfolio of two risky assets if the expected return E(R,), standard deviation (a), covariance (COV;;), and asset weight (W)) are as stown above? a) 8.6% b) 8.1% °) 9.3% a 10.2% ©) 11.6% ‘Whaat is the siandard deviation of this portfolio? a) $.02% bd) 3.88% 6.21% ad 4.04% ee) 4.34% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (B) E(Ry) = 8% E(Rp) = 15% (G4) = 10% Wa=0.6 (b) 20 @2i What is the expected return of a portfolio of two risky assets if the expected return E(Rj), standard deviation (6), covariance (COV(,), and asset weight (W)) are as shown above? a) 8.0% b) 12.2% °) 74% 4) 9.1% e) 11.6% ‘What is the standard deviation of this portfolio? a) 3.89% b) 4.61% c) 5.02% d) 6.83% 2) 6.09% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS (2 (a) 23 Asset (A) Asset (B) E(Ra) = 16% E(Rp) = 10% (Gy) = 9% (6p) = 7% Wa=0.5 Wa =05 COV» = 0.0009 What is the expected return of a porfolio of two risky assets if the expected return E(R)), standard deviation (), covariance (COV;,), and asset weight (W)) are as shown above? a) 10.6% by 10.2% 3) 13.0% a 119% ©) 14.0% ‘What is the standard deviation of this portfolio? a) 6.08% by 5.89% ©) 7.06% a 6.54% ©) 7.26% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS Asset (A) Asset (RB) ER) = 7% E(Rs) = 9% (a) = 6% (ox) = 5% Wa=0.6 Ws=04 COVan = 0.0014 @m (a) 25 a What is the expected return of a portfolio of two risky assdts if the expected return E(R)), standard deviation (Gj), covariance (COV;;), and asset weight (W,) are as shown above? a) 5.8% b) 6.1% 6.9% Q 78% 2) 89% What is thet a) 4.87% b) 3.62% ©) 4.13% 5.76% ©) 6.02% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS (e) 26 (b) 27 Asset (A) Asset (B) E(Rq) = 10% E(Rp) = 14% (on) = 7% (Gp) = 8% Wa=07 Wa =0.3 COV» = 0.0013 What is the expected return of a portfolio of two risky assets if the expected retum E(R), standard deviation (¢;), covariance (COV,,), and asset weight (W,) are as shown above? a) 6.4% b) 9.1% ©) 10.2% ad) 10.8% ©) 11.2% ‘What is the stendard deviation of this portfolio? a) 4.51% by 5.94% ) 6.75% a) 7.09% ©) 8.62% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS, Asset (B) ERp)= 13% (oxi = 6% We=0.7 COVas = 0.0011 (a) 28 ‘What is the e»pected return of a portiolio of two risky asset: if the expected return E(R)), standard deviation (@)), covariance (COV;,), and asset weight (W,),are as shown above? a) $7 10,10% b) 11.60% ©) 13.88% d) 14.50% ©) 15.37% f@ % What is the “Indard deviation of this portfolio? a) 5.16% by 5.89% ce} 611% ad 6.57% e) 7.02% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS. Asset (A) COVA» = 0.0014 ©) 0 What is the expected return of a portfolio of two risky assets if the expected return E(R)), standard deviation (G), covariance (COV),) and asset weight (W)) are as shown above? a) 1% by 12% ©} 13% a 14% eo) 15% © 31 gy Whats the sandard deviation ofthis portfolio? a) b) 488% 5.24% a) S086 ©) 6.52% USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS. Asset E(R))= 0.28 EG.) = 0.15 W) = 0.42 n2=0.7 (d) 2 (3B Calculate the expected retum of the two stock portfolio. a) 0,107 b) 0.1367 ©) 0.1169 @) 0.1872 ©) 0.20 Calculate the expected standard deviation of the two stock portfolio, a) 0.1367 b) 0.1872 ©) 0.1169 40.20 ©) 0.3950 USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS. (@) (a) 35 (d) 36 Asset 1 E(R,)=.12 E(o)) =.04 Calculate the expected return and expected standard deviation of a two stock portfolio when r)2 = - .60 and wy =.75. a) 13 ant 0024 b) 13 and 0455 ©) 12 and 0585 d) 12 and 5585 ©) 13 and 6758 Calculate theexpected returns and expected standard deviations of a two stock portfolio when r)2 = .80 and w, = .60. a) 144 and 0002 b) 144 and 0018, ©) 136 and .0045 d) 136 and .0455 ©) 136 ad 4554 Consicer two securities, A and B. Security A and B have a correlation coefficient of 0.65. Securty A has standard deviaion of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities. es 9 300 b) 461.54 ©) 261.54 a) 195 ©) 200 (a) 37 Calcukte the expected return for a three asset portfolio with the following Asset Exp. Ret. Std. Dev Weight A 0.0675 0.12 0.25 B 0.1235 0.1675 0.35 c 0.1425 0.1835 0.40 a) 11.71% by) 11.12% ©) 15.70% ad) 14.25% ) 6.75%. (©)38 Given the following weights and expected security returns, calculate the expected return for the portté Weight Expected Return 20 06 25 08 30 10 25 12 a) 085 b) 90 ©) 2 a) 97 ) None of the above 10 CHAPTER7 ANSWERS TO PROBLEMS Fan = (Gan) = ((6a)(6p)] = (0.003) + (0.18)(0.16) = 1042 Fp = (Gan) = ((64N6p)] = (0.03) + @27)(0.14) = 7937 tap = (Gan) = [(64)(6n)] = (0.0014) +(0.19)(0.06) = 1228 Fp = (AB) = [(64)0p)] = (0.0008) +(0.06)(0.07) = 1458 tag = (Gap) + [(6,)(s)] = (0.0009) +(0.10)(0.09) = .1000 Fan = (Gan) ~ [(6a)(6n)] = (0.0007) +(0.08)(0.10) = 0875 Wr 15,000 192,000 = 0.4947 Wr = 32,0004 192,000 = 0.1667 We = 65,000 192,000 = 0.3385, 0.1338 = (0.4947)(0.12) + (0.1667)(0.0875) + (0.3385)(0.177) Wx = 125,000 + 550,000 = 0.2273 Wy = 250,000 = 550,000 = 0.4545 Wz = 175,000 + 550,000 = 0.3182 0.1827 = (0.2273)(0.08) + (0.4545)(0.25) + (0.3182)(0.16) Wa = 25,000 + 200,000 = 0..125 Wa = 100,000 = 200,000 = 0.50 We = 75,000 + 200,000 = 0.375 0.1575 = (0.125)(0.38) + (0.5)(0.1) + (0.375)(0.16) Wp = 50,000 + 150,000 = 0.33 (0.33)(10) = 3.33 We = 40,000 + 150,000 = 0.27 0.2711) = 2.93 12 13 14 15 16 17 18 19 20 21 3.33 + 2.93 + 6.4 = 12.66% W_ = 50,000 = 150,000 = 0.33 (0.33)(13)= 4.33 War = 25,000 + 150,000 = 0.167 (0.167)(9) = 1.50 Wy = 75,000 + 150,000 = 0.50 (0.50)(14)=7.0 4.33 + 1.50 + 7.0 = 12.83% E(R,) = WaE(R,) + WER) = (0.25)(10) + (0.75)(15) = 13.75% [OW ay. (oa)? + Wa)* (on)? + (2)(Wa)Wa)(COVa.0))'? (0.25)°(0.08)* (0.75)(0.095)° + (2)(0.25(0.75 (0.006 )]"> 79% AE(Ra) + WeE(Rp) (0.75)(25) + (0.25)(15) = 22.5% p= [Wal (Ga) + (Wa)? (on) + (2)(WalWa)(COVa8)"” (0.75)20.18)° (0.25)2(0.11)* + (2(0.75)(0.25)(-0.0009}'* 3.65% WAE(Ra) + WaE(Rp) (0.4)(9) + (0.6)(11) = 10.20% Gp = [Way (Gay + Wa = (0.4) (0.04) (0.6)"(0.06)" +(2)(0.4)(0.6)(0.001 1), = (0.002080)'* = 4.56% (on)? + (2)(Wa)(Wa (COV ap)" E(R,) = WB(Ra) + WaE(Rp) (0.2)(10) + (0.7)(8) = 8.6% 6 = [Way a)? + Wa)” (on)? + (2) Wa)(Wa (COV an)" = [(0.3)'0.06)" (0.7)°(0.05)° + (2)(0.3)(0.7(0.0008)] = (0.001885)! = 4.34% WAE(Ra) + WaE(Rn) (O4N(B) + (0.6)(15) = 12.2% ER) Gy = [OWaY Gay?” + Wa)” (on) + (2)W Wa (COV a.u)]'? CHAPTER 7 - APPENDIX A MULTIPLE CHOICE PROBLEMS. USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS ‘The general equation “or the weight of the firt security to achieve the minimum variance (in a two stock portfolio) is given by W) = [E(63)° - 12 E(G))E(G2)] + [E(G1)° + E(o2)° - 2 112E(6)E(2)] (IA What weight of security 1 gives the minmum portfolio variance when 60), E(o)) = .1Oand E(o2) = 16? a) 0244 b) 3679 5697 6309 ©) 9756 (a) 24 Show the mininum portfolio variance fora two stock portfolio whet r, a) E(a:) + F(a,) - E(o)] b) — E(o:) + E(o)) + E(o:)) ©) E(o)) + E(o)- E(o.)} @) — E(o)) + E(o)) + E(@:)) ©) None ofthe above CHAPTER 7 - APPENDIX A ANSWERS TO FROBLEMS (IA (-16)" ~ 60 x .10 x .16(.016)] + [. 2.60K-10)(.16)] = 016 + .0164 = 9756 (a) 2A Substitute 1 for r12 in the general equation, W, = [E(o2" - (1) E(6)E(o2)] + [E(61)° + E(62)° - 2(1)E16,)E(o)] W, = [E(62" - E()E(o2)] + [E(o )° + E(62)° - 2E(o1) E62) W, = E(o2)[E(62) - E(o,)] + [E(G)) - E(o2) (2) + [E(o,) - E(o2)) MULTIPLE CHOICE PROBLEMS USE THE FOLLOWING INFORMATION FOR THE NEXT TWOPROBLEMS: ‘The general equation for the weight of the first security to ackieve the minimum. variance (in a tw9 stock portfolio) is gives by: W) = [E(61)" - 112 E(@:) Eto2)] + [E(1)" + E(62)° -2 112 E(@i) E(o2)) (©) 1B ‘Show the minimum portfolio varisnce for a portfolio of two risky assets when naeel. a) Bis) + [E(1) + E(o2)] b) Bio,) + [E(o1) - E(o2)] ©) Bios) + [E(o1) + E(o2)] 4) Eig) + [E(,)- E(o2)] ©) None of the above (@) 2B What is the value of W, when r)2 =~ 1 and E(o)) = .10 and E(o2) a) 45.46% b) 50.00% 3) 58.45% ad) 54.55% e) 74.58% CHAPTER 7 - APPENDIX B ” ANSWERS TO PROBLEMS: 1B Substitute -1 for r) 2 in the general equation W, =[E(6)°-(- DE(;)—- E(o2)] + [E(6,)" + EC (- IJE(G))E(2)] W, = [E(o:)" + E(6,)E(o2)] + [E(c,)° + E(o2)' + 2(1)E(G)E(G2)] W, = E(o2) (E(o2) + E(o,)] + (Ei) + E(o:)]° = E(o2)+ [E(G,) + E(o2)) 2B Wy = 12.12 + .10) = 5455 = 54.55%

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