[2008]Topic 63: Investors and Risk Management相关习题 investment, currently, companies, between, percent

nayizhenfeng

 

AIM 1: Describe how the covariance/correlation of returns between securities affects the returns distribution of a portfolio of securities.

 

1、Mital Tiene’s investment portfolio currently consists of stocks in two companies, 40 percent in Drysdahl Banking and the remaining amount in Clampett Oil. Performance measurement information for these two stocks is given in the table below:  

Stock	Expected Return	Standard Deviation
Drysdahl Banking	10.50%	8.5%
Clampett Oil	16.55%	25.0%

The covariance between the two stocks is 0.001. Tiene is considering adding a third stock, Hilbilee Investors. Hilbilee Investor’s correlation coefficient with the current portfolio is 0.38.

Which of the following statements is least accurate?

A) With Hilbilee added to the portfolio, the variance could be 0.026.  

B) As Tiene diversifies, he will reduce the portfolio's unsystematic risk. 

C) The standard deviation of returns for the current portfolio is 15.5%.  

D) The expected return of Tiene's current portfolio is approximately 14.1%.

nayizhenfeng

 

The correct answer is B

 

In perfect capital markets, shareholders can eliminate diversifiable risk through their own diversification at zero cost.

nayizhenfeng

 

AIM 6: Demonstrate, using arbitrage and hedging, that hedging price risk with respect to output will not affect firm value.

1、In perfect capital markets, the only exception to the idea that firm hedging activities do not increase firm value is when:

A) diversifiable risk is decreased.  

B) systematic risk is decreased.  

C) there are no exceptions.   

D) risk premiums are very high.

nayizhenfeng

 

The correct answer is C

 

In perfect capital markets, there is no exception to the rule that hedging will NOT increase firm value. Assuming perfect markets, shareholders can hedge at the same cost as the firm. They will not pay the firm to do something that they can do on their own account at the same price.

nayizhenfeng

 

AIM 4: Explain why diversification strategies do not increase firm value.

1、In perfect capital markets, the firm cannot create value by hedging risks because:

A) risk is transferred costlessly.  

B) it is costly to transfer risk. 

C) the cost of bearing any risk does not vary across individuals or institutions.  

D) only systematic risk matters.

nayizhenfeng

 

The correct answer is C

 

In perfect capital markets, the firm cannot create value by hedging risks because shareholders can hedge at the same cost as the firm. They will not pay the firm to do something that they can do on their own account at the same price.

nayizhenfeng

 

2、In perfect capital markets, managers will be rewarded by shareholders for decreasing the firm’s diversifiable risk:

A) regardless of the cost.  

B) under no conditions. 

C) if the cost of reducing diversifiable risk is zero.  

D) if the cost of reducing diversifiable risk is sufficiently low.

nayizhenfeng

 

8、Consider the expected returns and standard deviations for the following portfolios:

< >>	Portfolio 1	Portfolio 2	Portfolio 3	Portfolio 4
Expected Return	10%	12%	11%	14%
Standard Deviation	14%	13%	12%	18%

Relative to the other portfolios, the portfolio that is not mean variance efficient is:

A) Portfolio 2.  

B) Portfolio 3. 

C) Portfolio 1.  

D) Portfolio 4.

nayizhenfeng

 

The correct answer is C

 

Portfolio 1 is not efficient because it has a lower expected return and higher risk than both Portfolios 2 and 3.

nayizhenfeng

 

The correct answer is C

 

In the context of the SML, a security is underpriced if the required return is less than the holding period (or expected) return, is overpriced if the required return is greater the holding period (or expected) return, and is correctly priced if the required return equals the holding period (or expected) return.

Here, the holding period (or expected) return is calculated as: (ending price – beginning price + any cash flows / dividends) / beginning price. The required return uses the equation of the SML: risk free rate + Beta × (expected market rate ? risk free rate).

§ For Alpha: ER = (31 – 25 + 2) / 25 = 32%, RR = 4 + 1.6 × (12 ? 4) = 16.8%. Stock is underpriced.

§ For Omega: ER = (110 – 105 + 1) / 105 = 5.7%, RR = 4 + 1.2 × (12 ? 4) = 13.6%. Stock is overpriced.

§ For Lambda, ER = (10.8 – 10 + 0) / 10 = 8%, RR = 4 + 0.5 × (12 ? 4) = 8%. Stock is correctly priced.