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 |