fin1set04spr09

# fin1set04spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

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CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Problem Set 4: Portfolios and Asset Prices NOTE: List all contributing group members legibly on the first page of your submission. A Multiple Choice Warmup Note: sometimes multiple choice questions may have multiple correct answers. Read carefully. 1. Suppose that the standard deviation of returns on each individual stock is 40% per annum and that the correlation between each pair of stocks is 0.25. What is the annual standard deviation of a well- diversified portfolio. (Assume 1 /N -→ 0 for a well-diversified portfolio) (a) 10% (b) 20% (c) 25% (d) Can’t say unless one knows the beta 2. What is the standard deviation of a poorly-diversified portfolio of stocks with an average beta of 1.21? (a) 1.1 times the standard deviation of r m (b) 1.21 times the standard deviation of r m (c) Can’t say without knowing more 3. What is the standard deviation of a poorly-diversified portfolio of stocks with an average beta of 0.8?

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