Suppose youve estimated that the fifth percentile value at risk of a portfolio is 30%. Now you wish to estimate the portfolios first percentile VaR (the value below which lie 1% returns). Will the 1% VaR be greater or less than - 30%?
The 1% VaR will be less than -30%. As percentile or probability of a return declines so does the magnitude of that return. Thus, a 1 percentile probability will produce a
smaller VaR than a 5 percentile probability.
You've just decided upon your capital allocation for the next year when you realize that you've underestimated both the expected return and the standard deviation of your risky portfolio by 4%. Will you increase, decrease, or leave unchanged your allocati
Decrease. Typically, standard deviation exceeds return. Thus, an underestimation of 4% in each will artificially decrease the return per unit of risk. To return to the proper risk return relationship the portfolio will need to decrease the amount of risk
Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the expected return and standard deviation of your clients portfolio?
Allocating 70% of the capital in the risky portfolio P, and 30% in risk-free asset, the client has an expected return on the complete portfolio calculated by adding up the expected return of the risky proportion (y) and the expected return of the proporti
What do you think would happen to the expected return on stocks if investors perceived an increase in the volatility of stocks?
Assuming no change in tastes, that is, an unchanged risk aversion, investors perceiving higher risk will demand a higher risk premium to hold the same portfolio they held before. If we assume that the risk-free rate is unaffected, the increase in the risk
You managed an equity fund with expected risk premium of 10% and a standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund. What is t
Expected return for your fund = T-bill rate + risk premium = 6% + 10% = 16%Expected return of client's overall portfolio = (0.6
16%) + (0.4
6%) = 12%Standard deviation of client's overall portfolio = 0.6 *14% = 8.4%
What is the reward-to-volatility ratio for the equity fund in the previous problem?
Reward tovolatility ratio= Portfolio Risk Premium/Standard Deviation of Portfolio Excess Return= 10% / 14%= 0.7143
A portfolio of non-dividend paying stocks earned a geometric mean return of 5% between January 1, 2005, and December 31, 2011. The arithmetic mean return for the same period was 6%. If the market value of the portfolio at the beginning of 2005 was $100,00
V(12/31/2011) = V(1/1/2005)
(1 + g)7= $100,000
(1.05)7= $140,710.04
Which of the following statements are true? A standard deviation:
A. Is the square root of variance
B. Is denominated in the same units as the original data
C. Can be a positive or negative number
A. True
B. True
C. False, standard deviation is positive
You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was
A.4%
B.3.5%
C.7%
D.11%
Dividend yield = 3.5 / 50 = .04
HPR = .04+.07 = .11
Rank the following from highest average historical return to lowest average historical return from 1926 to 2010.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
A.I, II, III, IV
B.III, IV, II, I
C.I, III, II, IV
D.III, I, II, IV
C. I, III, II, IV
The geometric average of -12%, 20%, and 25% is _________.
A.8.42%
B.11%
C.9.7%
D.18.88%
C.9.7%
Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment?
A.2.04%
B.12 %
C.12.24%
D.12.89%
C. 12.24%
(10,000-9,800/9800)(12/2) = 12.24%
In forming a portfolio of two risky assets what must be true of the correlation coefficient between their returns if there are to be gains from diversification?
So long as the correlation coefficient is below1.0, the portfolio will benefit from diversification because returns on component securities will not move in perfect lockstep. The portfolio standard deviation will be less than a weighted average of the sta
When adding risky asset to a portfolio of many risky assets which property of the asset is more important, its standard deviation or covariance?
The covariance with the other assets is more important. Diversification is accomplished via correlation with other assets. Covariance helps determine that number.
A portfolio's expected return is 12% its standard deviation is 20% and the risk-free rate is 4%. Which of the following would make for the greatest increase in the portfolios sharpe index?
A. Increase of 1% in expected return
B. A decrease of 1% in the ri
A and B will have the same impact of increasing the Sharpe ratio from .40 to .45
Which of the following statistics cannot be negative?
A. Covariance
B. Variance
C. E(r)
D. Correlation coefficient
B. Variance
Diversification is most effective when security returns are _________.
A. high
B. negatively correlated
C. positively correlated
D. uncorrelated
B. negatively correlated
The expected rate of return of a portfolio of risky securities is _________.
A. the sum of the securities' covariances
B. the sum of the securities' variances
C. the weighted sum of the securities' expected returns
D. the weighted sum of the securities' v
C. the weighted sum of the securities' expected returns
Beta is a measure of security responsiveness to _________.
A. firm-specific risk
B. diversifiable risk
C. market risk
D. unique risk
C. market risk
Are the following true or false?
A. Stocks with a beta of zero offer an expected rate of return of zero
B. The CAPM implies that investors require a higher return to hold highly volatile securities
C. You can construct a portfolio with beta of .75 by inve
a. False. According to CAPM, when beta is zero, the "excess" return should be zero.
b. False. CAPM implies that the investor will only require risk premium for systematic risk. Investors are not rewarded for bearing higher risk if the volatility results f
What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 15%?
A. 15%
B. Greater than 15%
C. Cannot be determined about risk free rate
A. 15%. Its expected return is exactly the same asthe market return when beta is 1.0.
What must be the beta of a portfolio with E(rp)=20% if ri=5% and E(rm)=15%?
E(rp)= rf+?[E(rM) -rf ]
Given rf= 5% and E(rM)=15%, we can calculate Beta: 20% = 5% + B(15% -5%) B= 1.5
An adjusted beta will be ______ than the unadjusted beta.
A. lower
B. higher
C. closer to 1
D. closer to 0
C. closer to 1
Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?
A. 6%
B. 15.6%
C. 18%
D. 21.6%
D. 21.6%
According to the capital asset pricing model, a security with a _________.
A. negative alpha is considered a good buy
B. positive alpha is considered overpriced
C. positive alpha is considered underpriced
D. zero alpha is considered a good buy
C. positive alpha is considered underpriced
You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?
A. 1.048
B. 1.033
A. 1.048
20,000/50,000=.4
12,000/50,000=.24
18,000/50,000=.36
.4(1.3) = .52
.24(1) = .24
.36(.8) = .288
Add them = 1.048