Module01Tutorial - July 2003 FIN2101 BUSINESS FINANCE II...

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Unformatted text preview: July 2003 FIN2101 BUSINESS FINANCE II MODULE 1 - RISK-RETURN ANALYSIS QUESTION 1 Discuss the measurement of portfolio risk and indicate how and why it differs from measuring risk for a single security. QUESTION 2 A friend is considering some investments and is confused. He asks you "What is this notion of probabilities and what does it tell me?". Provide an answer for him. Your friend comes back again and says "All right, I understand probabilities, now what confuses me are the notions of expected return and standard deviation. What do they tell me?". Once again, help your friend out. QUESTION 3 You are given the following information about the possible returns from an investment: Possible Returns Probabilities 0.12 0.15 0.09 0.60 0.06 0.25 Calculate the investment's expected return and the standard deviation of the return. QUESTION 4 You are considering a portfolio of two assets - A and B - and have obtained the following data: Return on A Return on B Probability 0.10 0.16 0.3 0.15 0.10 0.5 0.05 0.04 0.2 The returns on the two assets have a correlation coefficient of 0.3. What is the expected return and standard deviation of a portfolio consisting of 50% of A and 50% of B? July 2003 QUESTION 5 Over a period of three years, Security X had returns of 10%, 14% and 3%. For the same three years, Security Y had returns of 12%, 10% and 5%. (a) What is the standard deviation of returns for these two securities? (b) What is the covariance of returns between these two securities? (c) What is the correlation of returns? QUESTION 6 Referring to the data in Question 5 above, calculate the standard deviation of returns for a two-asset portfolio comprising 40% of funds invested in Security X and the remaining 60% invested in Security Y....
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This note was uploaded on 12/06/2011 for the course BUSINESS Finance taught by Professor Qilei during the Summer '11 term at Tianjin University.

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Module01Tutorial - July 2003 FIN2101 BUSINESS FINANCE II...

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