FIN 501 Lecture Notes - Lecture 2: Championship Off-Road Racing, List Of Wheel Of Time Characters

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crimsonalpaca842

20 Nov 2014

School

Ryerson University

Department

Finance

Course

FIN 501

Professor

Lianzeng(edward) Yuan

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Document Summary

Portfolio weight % of a portfolio"s total value invested in a particular asset. Expected returns the weighted average return on a risky asset, from today to some future date. Variance multiply each squared deviation by its probability, then add them up. 2 +2w a w b cov ( a ,b ) 2 +2w a w b sd a sd bcorr (r a ,r b) Asset allocation how an investor spreads portfolio dollars among assets. Security selection collection of possible risk-return combos available from portfolios of individual assets. Principle of diversification spreading an investment across a # of assets will eliminate some, but not all, risks. Time diversification fallacy annual variance grows each year by multiplying annual variance by # years. The tendency of the returns on 2 assets to move together. Imperfect correlation reduces portfolio risk as measured by the portfolio standard deviation. Corr (ra, rb) or = correlation between the returns on asset a + asset b.

Related Questions

1. If we are able to eliminate all of the unsystematic or diversifiable risk in a portfolio then, what is the result?

a.

a risk-free portfolio
b.
a portfolio that has an expected return of zero
c.

a portfolio that contains only systematic risk

2. A portfolio consists 20% of a risk-free asset and 80% of a stock. The risk-free return is 4%. The stock has an expected return of 15% and a standard deviation of 30%. Whatâs the expected return of the portfolio?

a.
9.5%
b.
15.0%
c.
12.8%

d.
2%

3. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?

a.
12%
b.
19.5%
c.

17%

4. For what value of the correlation coefficient for the returns of a pair of stocks will the benefits of diversification the largest?

a.

1.0
b.

-1.0
c.

0.0
d.

0.5

5. Which of the following is an example of systematic risk?
a.
IBM posts lower than expected earnings.
b.
The overall stock market becomes more risky due to super fasting trading algorithms.
c.

Intel announces record earnings.

6. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to

a.
zero
b.
the expected risk premium on the market portfolio
c.
the expected return on the market portfolio
d.
the risk-free rate

7. A portfolio has 40% invested in Asset 1, 50% invested in Asset 2 and 10% invested in Asset 3. Asset 1 has a beta of 1.2, Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8, whatâs the beta of the portfolio?

a.
0.80
b.
1.06
c.
1.27

8. Suppose you can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios has the best return relative to risk. (Hint: Calculate Sharpe Ratios the ratio of risk premium to standard deviation for each portfolio)

a.
portfolio with a standard deviation of 15% and an expected return of 12%
b.
portfolio with a standard deviation of 12% and an expected return of 9%
c.
portfolio with a standard deviation of 25% and an expected return of 18%
d.
portfolio with a standard deviation of 19% and an expected return of 15%

9. Which statements are TRUE regarding risk and return?

Statement I:
Diversification is the process of removing systematic risk from a portfolio.
Statement II:
In general, the greater the risk, the greater the return required by an investor.
Statement III:
Investors should focus on real returns if they are concerned about the purchasing power of their wealth.

a.
Statements II and III only
b.
Statement I only
c.
Statements I and III only
d.
Statements I and II only

10. The beta of the risk-free asset is:
a.

1.0
b.

0.5
c.

0.0
d.

-1.0

2. An equity portfolio manager rarely if fully invested in thefund but will have some funds in cash. Unfortunate, this createswhat is called a cash drag on the portfolio due to the low returnon cash funds. On way to deal with this is called neutralizingcash. It involves using stock index futures to synthetically raisethe equity position of the portfolio to overcome the cash drag. Theportfolio currently has an asset value of $500 million. 95% of itis invested in a stock portfolio that has an average beta=1.0. Thereaming 5% is in a cash fun. In a six month period the broad market(s&p) rise by 11.50% while the cash fund rises by 2.5%.

a. Based on the portfolio weight, compute the portfolio weightaverage over the six month period. Compare this return to the boardmarket return. How much did the portfoliounderperform the market?

b. One way to add return is to synthetically add stock exposurewith stock index futures. We want to have a synthetically portfoliothat has 100% stock exposure so we need to add 5% of the portfoliovalue in stock index future? The current index future price is 1200and the contract size is $250 times the index. This is differentthan hedge in that we want the additional stock exposure so wewould take a long position inn future. The chosen contract willmature three months from today?

c. In three months the following changes have taken place: TheS&P 5 has gone from 1120 to 1220 and the contract matures soconvergence taken place. Based on portfolio these parameters,analyze the performance of the futures position. How much portfoliovalue did the extra equity exposure add?

sangriaskunk539

1. You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 35 percent in Stock S, and 30 percent in Stock T. The betas for these four stocks are 1.1, 0.8, 1.2, and 0.9, respectively. What is the portfolio beta? (Round your answer to 3 decimal places.)

2. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.95, and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? (Round your answer to 2 decimal places.)

Beta
3. A share of stock sells for $38 today. The beta of the stock is 1, and the expected return on the market is 17 percent. The stock is expected to pay a dividend of $1.10 in one year. If the risk-free rate is 3.7 percent, what should the share price be in one year? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Share price

4. A stock has a beta of 0.7 and an expected return of 9 percent. A risk-free asset currently earns 4 percent.

a.	What is the expected return on a portfolio that is equally invested in the two assets? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Expected return

b.	If a portfolio of the two assets has a beta of 0.6, what are the portfolio weights?(Round your answers to 2 decimal places. Omit the "%" sign in your response.)

	Weight
x_S	%
x_rf	%

c.	If a portfolio of the two assets has an expected return of 8 percent, what is its beta? (Round your answer to 2 decimal places.)

Beta

d.	If a portfolio of the two assets has a beta of 2.80, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Omit the "%" sign in your response.)

	Weight
x_S	%
x_rf	%

5. Asset W has an expected return of 8 percent and a beta of 2. If the risk-free rate is 5.5 percent, what is the market risk premium? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Market risk premium

6. Stock Y has a beta of 1.5 and an expected return of 12 percent. Stock Z has a beta of 0.8 and an expected return of 8 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Risk-free rate

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FIN 501 Lecture Notes - Lecture 2: Championship Off-Road Racing, List Of Wheel Of Time Characters

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