Final Exam Study Guide BA 472.docx - Following is a Study Guide for BA 472 Final Exam Chapters 7 8 9 and portions of 10 and 12 I have selected a number

Final Exam Study Guide BA 472.docx - Following is a Study...

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Following is a Study Guide for BA 472 Final Exam, Chapters 7, 8, 9, and portions of 10, and 12. I have selected a number of text questions from each chapter and provided the author’s solutions at the end of the question section. Next, I identify a number of text problems and then the solutions. The exam will be held during the scheduled final exam period in our regular classroom. You may use a calculator but not a tablet or laptop. Between now and the final exam I will supplement and clarify this document as I write the exam. Feel free to contact me if you have questions and I will answer as quickly as possible. Part 1: End of Chapter Questions for chapters 7, 8, 9, 10, and 12 Chapter 7 End of Chapter Questions: 7-2 How is expected return for one security determined? For a portfolio? 7-3 The Markowitz approach is often referred to as a mean-variance approach. Why? The Markowitz model is based on the calculations for the expected return and risk of a portfolio. Another name associated with expected return is simply "mean," and another name associated with the risk of a portfolio is the "variance." Hence, the model is sometimes referred to as the mean-variance approach 7-5 What does it mean to say that portfolio weights sum to 1.0 or 100 percent? Each security in a portfolio, in terms of dollar amounts invested, is a percentage of the total dollar amount invested in the portfolio. This percentage is a weight, and the general assumption is that these weights sum to 1.0, accounting for all of the portfolio funds. 7-7 Many investors have known for years that they should not “put all of their eggs in one basket.” How does the Markowitz analysis shed light on this old principle? Markowitz was the first to formally develop the concept of portfolio diversification. He showed quantitatively why and how portfolio diversification works to reduce the risk of a portfolio to an investor. In effect, he showed that diversification involves the relationships among securities. 7-8 Evaluate this statement: With regard to portfolio risk, the whole is not equal to the sum of the parts. We cannot simply add up the individual (weighted) standard deviations of the securities in the portfolio and obtain portfolio risk. If we could, the whole would be equal to the sum of the parts. 7-9 How many, and which, factors determine portfolio risk? 7-10 What is the relationship between the correlation coefficient and the covariance, both qualitatively and quantitatively? 7-11 How many covariance terms would exist for a portfolio of 10 securities using the Markowitz analysis? How many unique covariances? 7-12 How many total terms (variances and covariances) would exist in the variance- covariance Final Exam Study Guide page 1
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matrix for a portfolio of 30 securities using the Markowitz analysis? How many of these are variances, and how many covariances?
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  • Spring '14
  • MilanP.Sigetich
  • Modern portfolio theory

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