Answers Test 4 Group A/B 2019-2020

1/2. Answer: c.
Using XB = 1 – XA rewrite the formulas for E(RP) and σ2(RP)
E(RP) = XAEA + (1-XA)EB
σ2(RP) = XA2σA2 + (1-XA)2σ2B + 2XA(1-XA)ρABσAσB
Next, we use the data on A and B to find
E(RP) = 0,10XA + 0,10
σ2(RP) = XA20,252 + (1-XA)20,202 + 2XA(1-XA)0,5x0,25x0,20=
= XA2(0,252 + 0,202 – 2 x 0,5 x 0,25 x 0,20)+XA(-2 x 0,202 + 2 x 0,5 x 0,25 x 0,20) + 0,202 =
= 0,0525XA2 – 0,03XA + 0,04
Now we move on to E(U)
E(U) = 0,05 (0,10XA + 0,10) – (0,0525XA2 – 0,03XA + 0,04) + 5,04
= -0,0525 XA2 + 0,035XA + 5,005
𝜕𝐸(𝑈)
𝜕𝑋𝐴
= -0,105XA + 0,035
Maximum 𝜕E(U) / 𝜕XA = 0, therefore XA = 0,035/0,105 = 0,333 = 33,3%
Thus XB = 66,7%

2/3. Answer: c.
C = short A, long B, short F & D = short A, long B, long F
a. False, since C is nog long but short in A
b. False, no correlation since F’s return is constant
c. True, since corr(D , A) = corr(shortA&longB&longF , A)
= corr(shortA,A) + corr(longB,A) + corr(longF,A) < 0
d. False, since D is not short but long in B

3/1. Answer: b.
Sharpe ratio = (EP – rf) / σP ; in short SR(P)
a. SR(A) = (0,10 – 0,05) / 0,10 = 0,5 b. SR(B) = (0,15 – 0,05) / 0,18 = 0,556
c. SR(C) = (0,05 – 0,05) / 0,04 = 0 d. SR(D) = (0,11 – 0,05) / 0,11 = 0,545

4/5. Answer: a
The market capitalization of A is: 20.000 x € 60 = €1.200.000,- xA=0,4
The market capitalization of B is: 40.000 x € 30 = €1.200.000,- xB=0,4
The market capitalization of C is: 30.000 x € 20 = € 600.000,- xC=0,2
€3.000.000,- xM=1,0
EM = 0,4 x 16% + 0,4 x 10% + 0,2 x 8% = 12%
X is long 30 x € 20 = € 600 worth of C
M: xA = 0,40 , xB = 0,40 , xC = 0,20
therefore X is long € 3000 in M (A:1200, B:1200, C:600)
X is short € 500 worth of F, thus net investment = € 2500
xM = 3000/2500 = 1,2 and xF = -500/2500 = -0,2
EOPT = xM EM + xF RF = 1,2 x 12% - 0,2 x 2% = 14%

5/6. Answer: d
Systematic risk = βP σM = 50% & σM = 40%, so βP = 1,25
SML: 23% = rf + 1,25 (20% - rf), so rf = 8%

6/4. Answer: b.
It should be Security Market Line instead of Capital Market Line (CML).
Individual securities are typically positioned to the right of the CML.