Royal Melbourne Institute of Technology

BAFI 1045

Topic 2

1)When individuals evaluate their portfolios they should evaluate

 

 

2. The probability of an adverse outcome is a definition of

 

 

3. The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is not such any assumption?

E. None of the above (all are the assumptions of the Markowitz model)  

 

1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
2. Investor maximize one-period expected utility

 

3. Investors estimate the risk of the portfolio on the basis of the variability of expected returns

 

4. Investors base decision solely on expected return and risk.

 

4. Markowitz believes that any asset or portfolio of assets can be described by

                parameter(s).

 

 

5. Semi-variance, when applied to portfolio theory, is concerned with

 

 

6. The  purpose   of calculating the   covariance between two stocks is to   provide a(n)        measure of their movement together.

 

7. In a two-stock portfolio, if he correlation coefficient between two stocks were to decrease over time every ting else remaining constant the portfolio's risk would

 

8. Which of the following statements about the correlation coefficient is false?

 

 

9. You are given a two-asset portfolio with a fixed correlation coefficient. If the weights of the two assets are varied the expected portfolio returns would be   and the expected portfolio standard deviation would be .

 

10. Given a portfolio of stocks, the envelope curve containing the set of the best possible combination is known as the

 

11. If equal risk is added moving along the envelope curve containing the best possible combinations the return will

 

12. A portfolio is considered to be efficient if:

 

D. Choice a and b

 

1. No other portfolio offers higher expected returns with the same risk.

 

2. No other portfolio offers lower risk with the same expected return.

 

13. The optimal portfolio is identified at the point of tangency between the efficient frontier and the

 

14. An individual investor's utility curves specify the tradeoffs he or she is willing to make between

 

15. As the correlation coefficient between two assets decreases, the shape of the efficient frontier

 

16. A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. which security would enable the highest level of risk diversification?

 

17. A positive covariance between two variables indicates that

 

 

18. A positive relationship between expected return and expected risk is consistent with

 

 

19. The slope of the efficient frontier is calculated as follows

 

 

20. The slope of the utility curves for a strongly risk-averse investor, relative to the slope of the utility curves for a less risk-averse investor, will

 

21. All of the following are assumptions of the Markowitz model accept

 

 

22. The most import criteria when adding new investments to a portfolio is the

 

 

23. A portfolio of two securities that are perfectly positively correlated has

 

E. All of the above

 

1. A standard deviation that is the weighted average of the individual securities standard deviations
2. An expected return that is the weighted average of the individual securities expected returns

 

3. No diversification benefit over holding either of the securities independently.

 

4. Both b and c

 

24. Between 1990 and 2000, the standard deviation of the returns of the NIKKEI and the DJIA indexes were 0.18 and 0.16, respectively, and the covariance of these index returns was 0.003. What was the correlation coefficient between the two market indicators?

25. Between 1994 and 2004, the standard deviation of the return for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?

 

26. Between 1980 and 1990, the standard deviation of the returns of 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 indicators?

 

27. Between 1975 and 1985, the standard deviation of the return for the NYSE and the S&P 500 indexes were 0.06 and 0.07, respectively, and the covariance of these index returns was 0.0008. What was the correlation coefficient between the two market indicators?

 

28. Between 1986 and 1996, the standard deviation of the return 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?

 

29. Between 1980 and 2000, the standard deviation of the returns of 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?

 

30. What is the expected return of the three-stock portfolio described below?

 

Common Stock	Market Value	Expected Return
Ando Inc.	95,000	12.0%
Bee Co.	32,000	8.75%
Cool Inc.	65,000	17.7%

 

 

 

 

 

 

 

31. What is the expected return of the three-stock portfolio described below?

Common Stock	Market Value	Expected Return
Xerox	125,000	8%
Yelcon	250,000	25%
Zwiebal	175,000	16%

 

 

 

32. What is the expected return of the three-stock portfolio described below?

 

Common Stock	Market Value	Expected Return
Alko Inc.	25,000	38%
Belmont Co.	100,000	10%
Cardo Inc.	75,000	16%

 

 

33. What is the expected return of the three-stock portfolio described below?

 

Common Stock	Market Value	Expected Return
Delton Inc.	50,000	10%
Efley Co.	40,000	11%
Grippon Inc.	60,000	16%

 

 

34. What is the expected return of the three-stock portfolio described below?

 

Common Stock	Market Value	Expected Return
Lupko Inc.	50,000	13%
Mackey Co.	25,000	9%
Nippon Inc.	75,000	14%

 

 

35. Consider two securities, A and B, Security A and B have a correlation coefficient of

0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

 

 

36. Calculate 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

 

 

 

37. Given the following weights and expected security returns, calculate the xpected return for the portfolio

 

Weight	Expected Return
0.20	0.06
0.25	0.08
0.30	0.10
0.25	0.12

 

 

Q: A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period.

 

Probability	Return
0.10	-0.20
0.25	-0.05
0.40	0.15
0.25	0.30

 

38. Calculate the expected return for Magnum Oil.

 

 

39. Calculate the standard deviation for Magnum Oil.

 

 

 

 

 

 

 

Q: Stocks A and B have a correlation coefficient of -0.8. The stocks expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed.

Stock	Expected Return	Standard Deviation
A	20%	25%
B	15%	19%

 

 

40. What is he expected return of the stock A and B portfolio?

 

 

41. What is the standard deviation of the stock A and B portfolio?

 

 

42. What percentage of stock A should be invested to obtain the minimum risk portfolio that contains stock A and B?

 

43. What is the standard deviation of an equally weighted portfolio of two stocks with a covariance of 0.009, if the standard deviation of the first stock is 15% and the standard deviation of the second stock is 20%?