Question 1

Please select the correct statement(s) from the below choices.

[removed]Covariances lie between 0 and 1.

[removed]Two random variables with zero correlation tend to move in opposite directions.

[removed]Two random variables with positive correlation tend to move in the same direction.

[removed]Mean and variance are measured in the same units.

[removed]None of the above statements are correct.

Question 2

Please use the information below to answer Questions 2 through 7. The stocks of two companies, the Banana Company and the Orange Company, have the following payoff distributions over 4 possible states of the world.

What is the mean payoff of Banana stock?   Please give answer correct to three decimal places. For example, if the correct answer is 10.2556, please enter 10.256

Question 3

What is the mean payoff of Orange stock?   Please give answer correct to three decimal places. For example, if the correct answer is 10.2556, please enter 10.256

Question 4

What is the standard deviations of Banana stock?   Please give answer correct to three decimal places. For example, if the correct answer is 10.2556, please enter 10.256

Answer for Question 4

Question 5

What is the standard deviation of Orange stock?   Please give answer correct to three decimal places. For example, if the correct answer is 10.2556, please enter 10.256

Answer for Question 5

Question 6

Take a portfolio with weight Π = 0.25 in Banana and weight 1 – Π = 0.75 in Orange. What is the mean payoff of this portfolio?   Please give answer correct to three decimal places. For example, if the correct answer is 10.2556, please enter 10.256

Question 7

What is the standard deviation of the portfolio in Question 6?   Please give answer correct to three decimal places. For example, if the correct answer is 10.2556, please enter 10.256

Question 8

Mehmet has 45% of his money in the stock of the Blue Corporation, and the remainder of his money in the stock of the Red Corporation. Based on historical data, the standard deviation for Blue Corporation stock is 30% and the standard deviation for Red Corporation is 15%. Quantitative analysts believe the correlation between Blue and Red stock is 0.55. Please help Mehmet calculate the standard deviation of his portfolio.

Question 9

Torben has a well-diversified portfolio of stocks with an average beta of 0.71. The standard deviation of the market portfolio is 0.25. What is the standard deviation of Torben’s portfolio?

Question 10

Camille has borrowed $3,500 at 6% and invests this money alongside $3,500 of her own funds in a portfolio of stocks. The stock portfolio has a standard deviation of 30%. What is the standard deviation of Camille’s investment?

Question 11

[Exam-type Question] Please use the information below to answer Questions 11 and 12. Martin received a gift of $3,000, which he invests along with $2,000 of borrowed funds in the market portfolio. We assume that all of the assumptions underlying the Capital Asset Pricing Model (CAPM) are satisfied in this economy. Market analysts forecast the expected return on the market portfolio to be 12%, and the risk-free interest rate is 3%. The standard deviation of the market portfolio is 10%. Calculate the expected return of Martin’s portfolio.

Question 12

What is the standard deviation of Martin’s portfolio?

Question 13

[Exam-type Question] Assume the assumptions of the Capital Asset Pricing Model (CAPM) hold. Jennifer is a wealth manager advising clients on portfolio allocation. Analysts at her firm believe the expected return on the market portfolio is 18% with a 20% standard deviation. The risk-free interest rate is 6%. Jennifer’s client would like to construct a portfolio with an expected return of 15%. What would be the standard deviation of this portfolio, under the CAPM?