Midsemester test

Question 1 comment

This question requires students to demonstrate they can calculate the PV of a single cash flow using
the correct discount rate to do so.
$1,000
1(a) 0.06 12
= $941.91
�1+ �
12

$1,000
1(b) 0.06 4
= $942.18
�1+ �
4

$1,000
1(c) 0.06 6
= $970.52
�1+ �
12

Question 1a

Consider the following information obtained today:

• Relevant rate of return observed in the market = 6% per annum compounding monthly
• Expected cash flow in 1 years’ time: $1000

Which of the following is closest to the PV of the cash flow given the information above?

$941.91

$942.18

$943.40

$970.52

Question 1b

Consider the following information obtained today:

• Relevant rate of return observed in the market = 6% per annum compounding quarterly
• Expected cash flow in 1 years’ time: $1000
•

Which of the following is closest to the PV of the cash flow given the information above?

$941.91

$942.18

$943.40

$970.52

Question 1c

Consider the following information obtained today:

• Relevant rate of return observed in the market = 6% per annum compounding monthly
• Expected cash flow in 0.5 years’ time: $1000

Which of the following is closest to the PV of the cash flow given the information above?

$941.91

$942.18

$970.52

$971.29
Question 2 comment

This question requires students to demonstrate they understand how to calculate the value of a
deferred perpetuity or a perpetuity due.
$50
2(a) $50 + 0.06 = $1,716.67
� �
2

1 $50
2(b) (1.03)1 × 0.06 = $1,618.12 [note that the perpetuity formula already allows for a 1 period delay
� �
2
until the first cash flow. As the first cash flow occurs in 2 half-years, we only need to discount back
one period]
1 $50
2(c) (1.03)3 × 0.06 = $ = $1,525.24 [note that the perpetuity formula already allows for a 1 period
� �
2
delay until the first cash flow. As the first cash flow occurs in 4 half-years, we need to discount back
three periods]

Question 2a

Consider the following information as it relates to a perpetuity-style security:

• Relevant rate of return observed in market = 6% per annum compounding half-yearly

• A regular cash flow of $50 per half year will be paid in perpetuity, with the first cash flow
occurring today

Which of the following is closest to the PV of the cash flow stream expected of this perpetuity?

$1,525.24

$1,618.12

$1,666.67

$1,716.67

Question 2b

Consider the following information as it relates to a perpetuity-style security:

• Relevant rate of return observed in market = 6% per annum compounding half-yearly

• A regular cash flow of $50 per half year will be paid in perpetuity, with the first cash flow
occurring in one years’ time

Which of the following is closest to the PV of the cash flow stream expected of this perpetuity?

$1,525.24

$1,618.12

$1,666.67

$1,716.67
Question 2c

Consider the following information as it relates to a perpetuity-style security:

• Relevant rate of return observed in market = 6% per annum compounding half-yearly

• A regular cash flow of $50 per half year will be paid in perpetuity, with the first cash flow
occurring in two years’ time

Which of the following is closest to the PV of the cash flow stream expected of this perpetuity?

$1,525.24

$1,618.12

$1,666.67

$1,716.67
Question 3 comment

This question requires students to display an understanding of the drivers of bond values.

Question 3a

Which of the following statements correctly describe the influence of different factors on bond or bill
values?

Holding other factors constant, a bond with a lower coupon rate will have a higher value.

Holding other factors constant, a bond with a lower yield to maturity will have a lower value.

Holding other factors constant, a treasury bill with a longer term to maturity will have a lower
value.

None of the other statements correctly describe the influence of different factors on bond or bill
prices.

Question 3b

Which of the following statements correctly describe the influence of different factors on bond or bill
values?

Holding other factors constant, a bond with a lower coupon rate will have a higher value.

Holding other factors constant, a bond with a lower yield to maturity will have a higher value.

Holding other factors constant, a treasury bill with a longer term to maturity will have a higher
value.

None of the other statements correctly describe the influence of different factors on bond or bill
prices.

Question 3c

Which of the following statements correctly describe the influence of different factors on bond or bill
values?

Holding other factors constant, a bond with a lower coupon rate will have a higher value.

Holding other factors constant, a bond with a lower yield to maturity will have a lower value.

Q4

None of the other statements correctly describe the influence of different factors on bond or bill
prices.
Question 4 comment

This question requires students to demonstrate they understand how coupon rates and term to expiry
influence a bond’s sensitivity to changes in yields.

Question 4a

Consider the following table from lectures:

Which of the following statements correctly describes the main point being made by this table as it
relates to bond price sensitivity?

Holding all else constant, as the term of a bond increases the sensitivity of the bond’s value to
changes in interest rates declines.

Holding all else constant, as the coupon rate of a bond increases the sensitivity of the bond’s value
to changes in interest rates declines.

Holding all else constant, as the risk of a bond increases the sensitivity of the bond’s value to
changes in interest rates declines.

None of the other statements correctly describe the main point being made by this table as it
relates to bond price sensitivity.

Question 4b

Consider the following table from lectures:

Which of the following statements correctly describes the main point being made by this table as it
relates to bond price sensitivity?

Holding all else constant, as the term of a bond increases the sensitivity of the bond’s value to
changes in interest rates increases.

Holding all else constant, as the coupon rate of a bond increases the sensitivity of the bond’s value
to changes in interest rates declines.

Holding all else constant, as the risk of a bond increases the sensitivity of the bond’s value to
changes in interest rates declines.
 None of the other statements correctly describe the main point being made by this table as it
relates to bond price sensitivity.

Question 4c

Consider the following table from lectures:

Which of the following statements correctly describes the main point being made by this table as it
relates to bond price sensitivity?

Holding all else constant, as the term of a bond increases the sensitivity of the bond’s value to
changes in interest rates increases.

Holding all else constant, as the coupon rate of a bond increases the sensitivity of the bond’s value
to changes in interest rates declines.

Holding all else constant, as the risk of a bond increases the sensitivity of the bond’s value to
changes in interest rates declines.

None of the other statements correctly describe the main point being made by this table as it
relates to bond price sensitivity.
Question 5 comment

This question requires students to demonstrate they understand how to value a 13-week treasury
note using simple interest conventions.
$10𝑚𝑚
5(a) 85
= $9,868,999.18
1+�� �0.057�
365

$10𝑚𝑚
5(b) 91
= $9,869,586.26
1+�� �0.053�
365

$10𝑚𝑚
5(c) 85
= $9,882,626.88
1+�� �0.051�
365

Question 5a

You purchased a 13-week Treasury note (face value of $10m) when it was first issued by the Australian
Government at a quoted market yield of 5.3% p.a. Six days later you sell the note at a yield of 5.7%
p.a.

Which of the following is closest to the price that you receive for the bill when you sold it?

$9,868,999.18

$9,869,586.26

$9,871,735.17

$9,882,626.88

Question 5b

You purchased a 13-week Treasury note (face value of $10m) when it was first issued by the Australian
Government at a quoted market yield of 5.3% p.a. Six days later you sell the note at a yield of 5.7%
p.a.

Which of the following is closest to the price that you paid for the bill when you bought it?

$9,868,999.18

$9,869,586.26

$9,872,070.98

$9,882,626.88

Question 5c

You purchased a 13-week Treasury note (face value of $10m) when it was first issued by the Australian
Government at a quoted market yield of 5.3% p.a. Six days later you sell the note at a yield of 5.1%
p.a.

Which of the following is closest to the price that you receive for the bill when you sold it?

$9,868,999.18

$9,869,586.26

$9,882,626.88

$9,884,830.59
Question 6 comments

This question requires the student to demonstrate that they understand the logical underpinnings of
the dividend growth model for valuation purposes.

Question 6a

Which of the following statements correctly describe how the dividend growth model can be validly
employed to value a security?

The dividend growth model assumes that the growth rate itself is variable.

The dividend growth model requires the specification of a discount rate that appropriately reflects
the time value of money

The dividend growth model does not require you to know anything about the next dividend to be
paid.

More than one of the other statements is correct.

Question 6b

Which of the following statements correctly describe how the dividend growth model can be validly
employed to value a security?

The dividend growth model assumes that the growth rate itself is a constant rate that doesn’t
change.

The dividend growth model does not require the specification of a discount rate that appropriately
reflects the time value of money

The dividend growth model does not require you to know anything about the next dividend
expected to be paid.

More than one of the other statements is correct.

Question 6c

Which of the following statements correctly describe how the dividend growth model can be validly
employed to value a security?

The dividend growth model assumes that the growth rate itself is variable.

The dividend growth model does not require the specification of a discount rate that appropriately
reflects the time value of money

The dividend growth model requires a forecast of the next dividend expected to be paid.

More than one of the other statements is correct.

Question 7 comments

This question requires students to do two things – 1. Apply the dividend growth model and 2. Allow
for the fact that a dividend is also going to be received today.
$4(1.06)
7a) 𝑃𝑃0 = $4 + � � = $57.00
0.14−0.06

$4(1.06)
7b) 𝑃𝑃0 = $4 + � � = $46.40
0.16−0.06

$6(1.06)
7c) 𝑃𝑃0 = $6 + � � = $85.50
0.14−0.06

Question 7a

PIN Ltd is a firm that has been underperforming for many years and has just had a change in
management. The new management team have just made an announcement that they will pay a
dividend today of $4, and they expect that in the future this annual dividend will grow at a constant
rate of 6% per annum. The required rate of return for PIN Ltd shares is 14% per annum. Which of the
following is closest to the current value of PIN Ltd shares? (note – you have not yet received today’s
dividend).

$46.40

$53.00

$57.00

$85.50

Question 7b

PIN Ltd is a firm that has been underperforming for many years and has just had a change in
management. The new management team have just made an announcement that they will pay a
dividend today of $4, and they expect that in the future this annual dividend will grow at a constant
rate of 6% per annum. The required rate of return for PIN Ltd shares is 16% per annum. Which of the
following is closest to the current value of PIN Ltd shares? (note – you have not yet received today’s
dividend).

$42.40

$46.40

$57.00

$85.50

Question 7c

PIN Ltd is a firm that has been underperforming for many years and has just had a change in
management. The new management team have just made an announcement that they will pay a
dividend today of $6, and they expect that in the future this annual dividend will grow at a constant
rate of 6% per annum. The required rate of return for PIN Ltd shares is 14% per annum. Which of the
following is closest to the current value of PIN Ltd shares? (note – you have not yet received today’s
dividend).

$46.40

$57.00

$79.50

$85.50
Question 8 comments

This question requires students to be able to demonstrate that they can value an irredeemable
preference share using a standard perpetuity approach.
$5
8a) 𝑃𝑃0 = � � = $38.46
0.13

$4
8b) 𝑃𝑃0 = � � = $30.77
0.13

$13
8c) 𝑃𝑃0 = � � = $162.50
0.08

=Question 8a

DEB Ltd is a listed firm that issued irredeemable preference shares some years ago. These preference
shares have a face value of $100, pay a fixed dividend of 5% per annum and the required return on
these securities is 13% per annum. There is one full year until the next dividend will be received.

Which of the following is closest to the value of a DEB Ltd preference share?

$30.77

$38.46

$138.46

$162.50

Question 8b

DEB Ltd is a listed firm that issued irredeemable preference shares some years ago. These preference
shares have a face value of $50, pay a fixed dividend of 8% per annum and the required return on
these securities is 13% per annum. There is one full year until the next dividend will be received.

Which of the following is closest to the value of a DEB Ltd preference share?

$30.77

$38.46

$80.77

$162.50

Question 8c

DEB Ltd is a listed firm that issued irredeemable preference shares some years ago. These preference
shares have a face value of $100, pay a fixed dividend of 13% per annum and the required return on
these securities is 8% per annum. There is one full year until the next dividend will be received.

Which of the following is closest to the value of a DEB Ltd preference share?

$30.77

$38.46

$162.50

$262.50
Question 9 comments

This question requires students to understand the link between payout, required rate of return and
growth rates and how these factors influence firm value.

Question 9a

Consider the following expression which can be used to estimate the value of a firm’s equity:
𝛼𝛼𝐸𝐸1
𝑃𝑃0 =
𝑘𝑘𝑒𝑒 − 𝑔𝑔
Which of the following statements correctly describes the implications of the expression above for
firm valuation?

Holding all else constant, as the proportion of a firm’s earnings retained within the firm increase,
the value of firm equity increases

Holding all else constant, as the required rate of return from the firm’s equity increases, the value
of firm equity increases

Holding all else constant, as the growth rate of firm earnings (and dividends) increases, the value
of firm equity declines

None of the other statements correctly describe implications of the expression provided for firm
valuation

Question 9b

Consider the following expression which can be used to estimate the value of firm’s equity:
𝛼𝛼𝐸𝐸1
𝑃𝑃0 =
𝑘𝑘𝑒𝑒 − 𝑔𝑔
Which of the following statements correctly describes implications of the expression above for firm
valuation?

Holding all else constant, as the proportion of a firm’s earnings retained within the firm decrease,
the value of firm equity increases

Holding all else constant, as the required rate of return from the firm’s equity increases, the value
of firm equity increases

Holding all else constant, as the growth rate of firm earnings (and dividends) increases, the value
of firm equity declines

None of the other statements correctly describe implications of the expression provided for firm
valuation
Question 9c

Consider the following expression which can be used to estimate the value of firm’s equity:
𝛼𝛼𝐸𝐸1
𝑃𝑃0 =
𝑘𝑘𝑒𝑒 − 𝑔𝑔
Which of the following statements correctly describes implications of the expression above for firm
valuation?

Holding all else constant, as the proportion of a firm’s earnings retained within the firm increase,
the value of firm equity increases

Holding all else constant, as the required rate of return from the firm’s equity increases, the value
of firm equity increases

Holding all else constant, as the growth rate of firm earnings (and dividends) increases, the value
of firm equity increases

None of the other statements correctly describe implications of the expression provided for firm
valuation
Question 10 comments

This question requires students to recall the discussion of the different items of information provided
by Yahoo finance that we went through in the lecture.

Question 10a

Consider the following screenshot taken from Yahoo Finance. Assume that the information contained
in the screenshot is displayed in real time.

Which of the following statements correctly describes information contained in the screenshot above?

If a trader wanted to buy shares in WES.AX immediately, the maximum number of shares they
could purchase at the best possible price is 31,900.

If a trader wanted to buy shares in WES.AX immediately, the maximum number of shares they
could purchase at the best possible price is 40,600.

If a trader wanted to buy shares immediately, the price that they would have to pay is $47.36.

More than one of the other statements are correct.

Question 10b

Consider the following screenshot taken from Yahoo Finance. Assume that the information contained
in the screenshot is displayed in real time.

Which of the following statements correctly describes information contained in the screenshot above?

If a trader wanted to sell shares in WES.AX immediately, the maximum number of shares they
could sell at the best possible price is 31,900.

If a trader wanted to sell shares in WES.AX immediately, the maximum number of shares they
could sell at the best possible price is 40,600.

If a trader wanted to buy shares immediately, the price that they would have to pay is $47.36.

More than one of the other statements are correct.

Question 10c

Consider the following screenshot taken from Yahoo Finance. Assume that the information contained
in the screenshot is displayed in real time.

Which of the following statements correctly describes information contained in the screenshot above?

If a trader wanted to buy shares in WES.AX immediately, the maximum number of shares they
could buy at the best possible price is 31,900.

If a trader wanted to sell shares in WES.AX immediately, the maximum number of shares they
could sell at the best possible price is 40,600.

If a trader wanted to buy shares immediately, the price that they would have to pay is $47.44.

More than one of the other statements are correct.

Question 11 comments

This question requires students to understand how to estimate a geometric average rate of return and
an arithmetic average rate of return.

11(a) and (b)

0.10+0.15+0.28
Average annual arithmetic return = � � = 17.67%
3
1�
Average annual geometric return = (1.10 × 1.15 × 1.18) 3 − 1 = 17.43%
0.10+0.15+0.08
11(c) Average annual arithmetic return = � � = 11%
3
1�
Average annual geometric return = (1.10 × 1.15 × 1.08) 3 − 1 = 10.96%

Question 11a

You invest in Handley Ltd shares at the start of 2019. Your investment returns are 10% in the first
year of your investment, 15% in the second year and 28% in the third year.

Which of the following statements correctly describe your returns over this three-year period?

Your average annual arithmetic return (rounded to 2 decimal places) is 17.67%

Your average annual geometric return (rounded to 2 decimal places) is 17.43%

None of the other answers is correct

More than one of the other answers is correct.

Question 11b

You invest in Handley Ltd shares at the start of 2019. Your investment returns are 10% in the first
year of your investment, 15% in the second year and 28% in the third year.

Which of the following statements correctly describe your returns over this three-year period?

Your average annual arithmetic return (rounded to 2 decimal places) is 17.43%

Your average annual geometric return (rounded to 2 decimal places) is 17.67%

None of the other answers is correct

More than one of the other answers is correct.

Question 11c

You invest in Handley Ltd shares at the start of 2019. Your investment returns are 10% in the first
year of your investment, 15% in the second year and 8% in the third year.

Which of the following statements correctly describe your returns over this three-year period?

Your average annual arithmetic return (rounded to 2 decimal places) is 17.67%

Your average annual geometric return (rounded to 2 decimal places) is 10.96%

None of the other answers is correct

More than one of the other answers is correct

Question 12 comments

This question requires students to understand the implications of the Fisher equation in terms of
separating out the impact of rising prices and rising purchasing power.
20
12(a) $12 = $5 × �1 + 𝑟𝑟𝑔𝑔 � ∴ 𝑟𝑟𝑔𝑔 = 4.47%
20
12(b) $15 = $10 × �1 + 𝑟𝑟𝑔𝑔 � ∴ 𝑟𝑟𝑔𝑔 = 2.05%
20
12(c) $15 = $5 × �1 + 𝑟𝑟𝑔𝑔 � ∴ 𝑟𝑟𝑔𝑔 = 5.65%

Question 12a

Consider the following information relating to the 20-year time period from 1940 to 1959 (inclusive):

A representative basket of goods cost $5 at the start of the first year and $12 by the end of the final
year. Which of the following is closest to the average annual geometric inflation rate?

2.05%

4.47%

5.65%

7.00%

Question 12b

Consider the following information relating to the 20-year time period from 1940 to 1959 (inclusive):

A representative basket of goods cost $10 at the start of the first year and $15 by the end of the final
year. Which of the following is closest to the average annual geometric inflation rate?

2.05%

2.50%

4.47%

5.65%

Question 12c

Consider the following information relating to the 20-year time period from 1940 to 1959 (inclusive):

A representative basket of goods cost $5 at the start of the first year and $15 by the end of the final
year. Which of the following is closest to the average annual geometric inflation rate?

2.05%

4.47%

5.65%

10.00%
Question 13 comment

This question requires the student to demonstrate an understanding of what risk-aversion actually
implies when ranking investment alternatives. Importantly, it does not mean that risk-averse investors
will always prefer the lowest risk asset (otherwise they would all hold the risk-free asset!). When
comparing assets, if one asset has a higher expected return and a higher risk than another, we cannot
say that risk averse investors will prefer one over the other as it depends upon the investor’s level of
risk aversion (which determines whether the additional return is sufficient compensation for the
additional risk they would be exposed to).

Question 13a

Consider the information relating to the following three investments; A, B and C:

Asset Expected return (% p.a.) Standard deviation of returns (% p.a.)

A 8 15
B 12 15
C 14 25

Which of the following statements correctly describe the attitude of risk-averse investors when
ranking these investments?

Risk-averse investors will always prefer Asset A to Asset B.

Risk-averse investors will always prefer Asset C to Asset B

Risk-averse investors will always prefer Asset C to Asset A

None of the other statements are correct.

Question 13b

Consider the information relating to the following three investments; A, B and C:

Asset Expected return (% p.a.) Standard deviation of returns (% p.a.)

A 12 15
B 8 15
C 14 25

Which of the following statements correctly describe the attitude of risk-averse investors when
ranking these investments?

Risk-averse investors will always prefer Asset A to Asset B.

Risk-averse investors will always prefer Asset A to Asset C

Risk-averse investors will always prefer Asset C to Asset A

More than one of the other statements are correct.

Question 13c

Consider the information relating to the following three investments; A, B and C:

Asset Expected return (% p.a.) Standard deviation of returns (% p.a.)

A 8 15
B 12 25
C 14 25

Which of the following statements correctly describe the attitude of risk-averse investors when
ranking these investments?

Risk-averse investors will always prefer Asset A to Asset B.

Risk-averse investors will always prefer Asset C to Asset B

Risk-averse investors will always prefer Asset C to Asset A

More than one of the other statements are correct.

Question 14 comment

This question requires students to demonstrate an understanding of the link between the correlation
coefficient (ρ1,2) and the diversification benefit associated with combining two assets into a portfolio.
Debra has clearly achieved a diversification benefit because the risk of her portfolio (22%) is less than
the weighted average risk of the individual assets (25%).

Question 14a

Debra is an investor just starting out in the stockmarket. She starts with a purchase of $10,000 of
shares in ABC Ltd which has a standard deviation of returns of 10% p.a. She then invests another
$10,000 purchasing shares in XYZ Ltd which has a standard deviation of returns of 40% p.a.. She
estimates that the standard deviation of returns of their portfolio has increased from 10% p.a. before
the XYZ purchase to 22% p.a. after the purchase.

Which of the following statements correctly describe what has happened (or could have happened)
to the risk position of Debra’s portfolio following the investment in XYZ?

Debra has experienced a diversification benefit.

Debra would only achieve a diversification benefit if the correlation coefficient between the
returns of ABC and XYZ shares is less than zero.

The maximum diversification benefit that Debra could expect is if the correlation coefficient
between the returns of the two assets is equal to zero.

None of the other statements is correct.

Question 14b

Debra is an investor just starting out in the stockmarket. She starts with a purchase of $10,000 of
shares in ABC Ltd which has a standard deviation of returns of 10% p.a. She then invests another
$10,000 purchasing shares in XYZ Ltd which has a standard deviation of returns of 40% p.a.. She
estimates that the standard deviation of returns of their portfolio has increased from 10% p.a. before
the XYZ purchase to 22% p.a. after the purchase.

Which of the following statements correctly describe what has happened (or could have happened)
to the risk position of Debra’s portfolio following the investment in XYZ?

Debra has not experienced any diversification benefit.

Debra would only achieve a diversification benefit if the correlation coefficient between the
returns of ABC and XYZ shares is less than +1.

The maximum diversification benefit that Debra could expect is if the correlation coefficient
between the returns of the two assets is equal to zero.

More than one of the other statements is correct.

Question 14c

Debra is an investor just starting out in the stockmarket. She starts with a purchase of $10,000 of
shares in ABC Ltd which has a standard deviation of returns of 10% p.a. She then invests another
$10,000 purchasing shares in XYZ Ltd which has a standard deviation of returns of 40% p.a.. She
estimates that the standard deviation of returns of her portfolio has increased from 10% p.a. before
the XYZ purchase to 22% p.a. after the purchase.

Which of the following statements correctly describe what has happened (or could have happened)
to the risk position of Debra’s portfolio following the investment in XYZ?

Debra has not experienced any diversification benefit.

Debra would only achieve a diversification benefit if the correlation coefficient between the
returns of ABC and XYZ shares is less than zero.

The maximum diversification benefit that Debra could expect is if the correlation coefficient
between the returns of the two assets is equal to ̶ 1 (i.e. negative one).

More than one of the other statements is correct.

Question 15 comment

This question requires students to demonstrate that they can estimate a correlation measure, given
the standard deviation of returns for the constituent assets and the covariance between those returns.
𝜎𝜎 0.015
15(a) 𝜌𝜌1,2 = 𝜎𝜎 1,2
𝜎𝜎
= = 0.5
1 2 0.15×0.20

𝜎𝜎 −0.015
15(b) 𝜌𝜌1,2 = 𝜎𝜎 1,2
𝜎𝜎
= = −0.5
1 2 0.15×0.20

𝜎𝜎 0.015
15(c) 𝜌𝜌1,2 = 𝜎𝜎 1,2
𝜎𝜎
= = 0.3
1 2 0.25×0.20

Question 15a

Asset 1 has a standard deviation of returns of 0.15 while Asset 2 has a standard deviation of returns
of 0.20. The covariance between the returns of the two assets is 0.015. Which of the following is
closest to the correlation coefficient between the returns of the two assets if they are combined into
a portfolio consisting of 70% asset 1 and 30% asset 2?

0.00045

0.50

̶ 0.50 (i.e. negative 0.50)

0.30

Question 15b

Asset 1 has a standard deviation of returns of 0.15 while Asset 2 has a standard deviation of returns
of 0.20. The covariance between the returns of the two assets is ̶ 0.015 (i.e. it is negative 0.015). Which
of the following is closest to the correlation coefficient between the returns of the two assets if they
are combined into a portfolio consisting of 70% asset 1 and 30% asset 2?

̶ 0.00045 (i.e. negative 0.00045)

0.50

̶ 0.50 (i.e. negative 0.50)

0.30

Question 15c

Asset 1 has a standard deviation of returns of 0.25 while Asset 2 has a standard deviation of returns
of 0.20. The covariance between the returns of the two assets is 0.015. Which of the following is
closest to the correlation coefficient between the returns of the two assets if they are combined into
a portfolio consisting of 70% asset 1 and 30% asset 2?

0.00075

0.50

̶ 0.50 (i.e. negative 0.50)

0.30