[ 2009 Mock Exam (AM) ] Portfolio Management .Questions 115-120 face, collected, following, border

bingning

115. An analyst collected the following data for an asset:

ossible Rate of Return (Percent)	robability
-10%	0.20
-5	0.30
10	0.40
25	0.10

The variance of returns for the asset are closest to:

A. 121.
B. 188.
C. 213.

116. An analyst gathered the following information about a portfolio comprised of two assets:

Asset	Weight (%)	Expected Return	Expected Standard Deviation
X	75	11%	5%
Y	25	7%	4%

 If the correlation of returns for the two assets equals 0.75, and the risk-free interest rate 1 percent, then the expected standard deviation of the portfolio is closest to:
A. 3.07%.
B. 4.23%.
C. 4.55%.

117. An analyst has gathered monthly returns for two stock indexes A and B:

Month	Returns for Index A	Returns for Index B
1	-6.4%	-6.2%
2	6.6%	19.0%
3	12.9%	-7.7%
4	3.2%	4.0%

The covariance between Index A and Index B is closest to:

A. 10.37.
B. 13.82.
C. 19.64.

xxjj564

 a

viss

123

bingning

118. A completely diversified portfolio will most likely result in the elimination of:

A. systematic variance.
B. unsystematic variance.
C. both systematic and unsystematic variance.

119. Beta can be viewed as:

A. a measure of unsystematic risk.
B. covariance of an asset with the market portfolio.
C. correlation coefficient with the market portfolio.

120. For an investor borrowing money at the risk-free interest rate to invest in the market portfolio, the estimated rate of return of his portfolio is most likely to:

A. increase.
B. decrease.
C. remain unchanged.

bingning

118. A completely diversified portfolio will most likely result in the elimination of:

A. systematic variance.
B. unsystematic variance.
C. both systematic and unsystematic variance.

Answer: B
“Managing Investment Portfolio: A Dynamic Process,” John Maginn, Donald Tuttle, Denis McLeavy, Jerald Pinto 2009 Modular Level I, Volume 4, pp. 256-258
Study Session 12-51-c The candidate should be able to define systematic and unsystematic risk, and explain why an investor should not expect to receive additional return for assuming unsystematic risk;
A completely diversified portfolio, such as the market portfolio, will eliminate all unsystematic risk. Systematic risk cannot be diversified away.

119. Beta can be viewed as:

A. a measure of unsystematic risk.
B. covariance of an asset with the market portfolio.
C. correlation coefficient with the market portfolio.

Answer: B
“Managing Investment Portfolio: A Dynamic Process,” John Maginn, Donald Tuttle, Denis McLeavy, Jerald Pinto
2009 Modular Level I, Volume 4, pp. 259-260
Study Session 12-51-d; Explain the capital asset pricing model, including the security market line (SML) and beta, and describe the effect of relaxing its underlying assumptions; Beta is a standardized measure of risk because it relates this covariance to the variance of the market portfolio.

120. For an investor borrowing money at the risk-free interest rate to invest in the market portfolio, the estimated rate of return of his portfolio is most likely to:

A. increase.
B. decrease.
C. remain unchanged.

Answer: A
“Managing Investment Portfolio: A Dynamic Process,” John Maginn, Donald Tuttle, Denis McLeavy, Jerald Pinto 2009 Modular Level I, Volume 4, p 254
Study Session 12-51 a;
The candidate should be able to explain the capital market theory, including the underlying assumptions, and explain the effect on expected returns, the standard deviation of returns, and possible risk/return combinations when risk-free asset is combined with a portfolio of risky assets;
An investor who wants to attain a higher estimated rate of return than the market portfolio may want to use leverage by borrowing money at the risk-free of interest.

bingning

 

115. An analyst collected the following data for an asset:

ossible Rate of Return (Percent)	robability
-10%	0.20
-5	0.30
10	0.40
25	0.10

The variance of returns for the asset are closest to:

A. 121.
B. 188.
C. 213.

Answer: A
“Managing Investment Portfolio: A Dynamic Process” John Maginn, Donald Tuttle, Denis McLeavy, Jerald Pinto
2009 Modular Level I, Volume 4, pp. 226-227
Study Session 12-50-c Compute and interpret the expected return, variance, and standard deviation for individual investment and expected return and standard deviation for a portfolio. The variance of returns is = [(-10-3).2+(-5-3).3+(10-3).4+(25-3).1]=121

116. An analyst gathered the following information about a portfolio comprised of two assets:

Asset	Weight (%)	Expected Return	Expected Standard Deviation
X	75	11%	5%
Y	25	7%	4%

 If the correlation of returns for the two assets equals 0.75, and the risk-free interest rate 1 percent, then the expected standard deviation of the portfolio is closest to:
A. 3.07%.
B. 4.23%.
C. 4.55%.

Answer: C
“An Introduction to Portfolio Management,” Frank K. Reilly and Keith C. Brown 2009 Modular Level I, Volume 4, pp. 226-241
Study Session 12-50-c Compute and interpret the expected return, variance, and standard deviation for an individual investment and the expected return and standard deviation for a portfolio.
Portfolio expected standard deviation = [(0. × 0.) + (0. × 0.) + (2 × 0.75 × 0.25 × 0.75 × 0.05 × 0.04)]0.5 = 4.55%

117. An analyst has gathered monthly returns for two stock indexes A and B:

Month	Returns for Index A	Returns for Index B
1	-6.4%	-6.2%
2	6.6%	19.0%
3	12.9%	-7.7%
4	3.2%	4.0%

The covariance between Index A and Index B is closest to:

A. 10.37.
B. 13.82.
C. 19.64.

Answer: B
“Managing Investment Portfolio: A Dynamic Process,” John Maginn, Donald Tuttle, Denis McLeavy, Jerald Pinto 2009 Modular Level I, Volume 4, pp. 229-231
Study Session 12-50-d Compute and interpret the covariance of rates of return, and show how it is related to correlation coefficient.
Calculation of the covariance proceeds as follows: 1) Compute the average for each index:
Index A = (-6.4 + 6.6 + 12.9+3.2)/4 = 4.08 Index B = (-6.2 + 19.0 - 7.7 + 4)/4 = 2.28 2) Compute the following sum: (-6.4-4.08) × (-6.2-2.28) + (6.6-4.08) × (19.0-2.28) + (12.9-4.08) × (-7.7-2.28) + (3.2-4.08) × (4.0-2.28) = 41.47
3) Divide the sum found in 2) by number of observation minus one = 41.47/(4-1) =13.82