4/22/2021 Quiz: Quiz 2 - Investment Portfolios, Risk and Asset Pricing

Quiz 2 - Investment Portfolios, Risk and Asset

Pricing
Started: Apr 22 at 11:35am

Quiz Instructions

Question 1 1 pts

Consider the stocks of two companies, A and B

For Company A: volatility of stock return = 50%

For Company B: volatility of stock return = 30%

Investors consider both risk and return when buying stocks.

Is the following statement true or false?: The expected return on Stock A

must be higher than the expected return on Stock B

True

False

Question 2 1 pts

Suppose the expected return on Stock X is 8% and its volatility is 30%. The
expected return on Stock Y is 4% and its volatility is also 30%. The two stocks
have correlation of 0.

Calculate the expected return on the portfolio of X and Y that has minimum
variance (the minimum variance portfolio). Type your answer below, in
percentage terms rounded to the nearest whole percent (e.g., 8.05% would
be written as 8)

Question 3 1 pts
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4/22/2021 Quiz: Quiz 2 - Investment Portfolios, Risk and Asset Pricing

Suppose the expected return on Stock X is 8% and its volatility is 30%. The
expected return on Stock Y is 4% and its volatility is also 30%.

How does the minimum variance portfolio in the case of correlation 0

(uncorrelated) compare to the minimum variance portfolio in the case of
correlation -1 (perfect negative correlation)? Select all correct answers from
the list below.

portfolio under correlation=0 has lower expected return than portfolio with correlation =-1

portfolio under correlation=0 has same volatility as portfolio with correlation =-1

portfolio under correlation=0 has higher volatility than portfolio with correlation =-1

portfolio under correlation=0 has the same expected return as portfolio with correlation
=-1

portfolio under correlation=0 has lower volatility than portfolio with correlation =-1

portfolio under correlation=0 has higher expected return than portfolio with correlation =-1

Question 4 1 pts

Suppose Company A's stock return has a volatility of 50% and its correlation with
the Market Portfolio is 80%. The expected return on the Market Portfolio is 7%,
the volatility of the Market Portfolio is 20%, and the riskfree interest rate is 1%.

Calculate the Beta for Company A. Type your answer below

Question 5 1 pts

Suppose Company A's stock return has a volatility of 50% and its correlation with
the Market Portfolio is 80%. The expected return on the Market Portfolio is 7%,
the volatility of the Market Portfolio is 20%, and the riskfree interest rate is 1%.

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4/22/2021 Quiz: Quiz 2 - Investment Portfolios, Risk and Asset Pricing

Calculate the expected rate of return on the stock of Company A. Type your
answer below, in percentage terms rounded to the nearest whole percent
(e.g., 8.05% would be written as 8)

Question 6 1 pts

Suppose Company A's stock return has a volatility of 50% and its correlation with
the Market Portfolio is 80%. Company B's stock return has a volatility of 40% and
its correlation with the Market Portfolio is 25%. The expected return on the Market
Portfolio is 7%, the volatility of the Market Portfolio is 20%, and the riskfree
interest rate is 1%. Suppose you invest $2 million of your wealth in Stock A and $1
million in Stock B.

Calculate the Beta of your stock portfolio. Type your answer below

Question 7 1 pts

Suppose Company A's stock return has a volatility of 50% and its correlation with
the Market Portfolio is 80%. Company B's stock return has a volatility of 40% and
its correlation with the Market Portfolio is 25%. The expected return on the Market
Portfolio is 7%, the volatility of the Market Portfolio is 20%, and the riskfree
interest rate is 1%. Suppose you invest $2 million of your wealth in Stock A and $1
million in Stock B.

Calculate the expected return on your stock portfolio. Type your answer
below, in percentage terms rounded to the nearest whole percent (e.g.,
8.05% would be written as 8)

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Question 8 1 pts

Suppose Company A's stock return has a volatility of 50% and its correlation with
the Market Portfolio is 80%. Company B's stock return has a volatility of 40% and
its correlation with the Market Portfolio is 25%. The expected return on the Market
Portfolio is 7%, the volatility of the Market Portfolio is 20%, and the riskfree
interest rate is 1%. Stocks A and B have zero correlation with each other.
Suppose you can invest in four possible assets: Stock A, Stock B, the Market
Portfolio and the riskfree government bond.

What would you invest in if you wanted the most efficient (lowest portfolio
volatility) way to earn an expected return of 4%? Select from the choices
below.

100% in stock B

-100% (short) market portfolio, +200% riskfree bond

-100% (short) riskfree bond, + 200% in market portfolio

50% in riskfree bond, 50% in market portfolio

50% stock A, 50% stock B

100% in the riskfree bond

100% in stock A

100% in the market portfolio

Question 9 1 pts

Suppose Company A's stock return has a volatility of 50% and its correlation with
the Market Portfolio is 80%. Company B's stock return has a volatility of 40% and
its correlation with the Market Portfolio is 25%. The expected return on the Market
Portfolio is 7%, the volatility of the Market Portfolio is 20%, and the riskfree
interest rate is 1%. Stocks A and B have zero correlation with each other.
Suppose you can invest in four possible assets: Stock A, Stock B, the Market
Portfolio and the riskfree government bond.

What would you invest in if you wanted the most efficient (lowest portfolio
volatility) way to earn an expected return of 13%? Select from the choices

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4/22/2021 Quiz: Quiz 2 - Investment Portfolios, Risk and Asset Pricing

below.

50% in riskfree bond, 50% in market portfolio

50% stock A, 50% stock B

-100% (short) market portfolio, +200% riskfree bond

100% in the riskfree bond

-100% (short) riskfree bond, + 200% in market portfolio

100% in stock A

100% in stock B

100% in the market portfolio

Question 10 1 pts

Consider the statement: "You can never make a profit buying US government
bonds because they are 'risk-free', and investors only earn a positive expected
return for bearing risk".

Is the statement above true or false?

True

False

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