Chapter_11_12_13_sol

# Considerthefollowingcovariancesbetweensecurities duke

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Unformatted text preview: stock, unless all of the stocks are uncorrelated with the portfolio, the risk of the portfolio will be lower than the weighted average volatility of the individual stocks. Answer: D Explanation: A) B) C) D) 14) Which of the following formulas is incorrect? A) 1 1 Variance of an equally Weighted Portfolio = (1 - )(Average Variance of Individual Stocks) + n n (Average covariance between the stocks) B) Variance of a portfolio = xixjCov( Ri, Rj ) ∑∑ i j ∑ x Cov( R , R ) D) Variance of a portfolio = ∑ x Cov( R , ∑ x R ) C) Variance of a portfolio = i i i p i i i jj j Answer: A Explanation: A) 1 Variance of an equally Weighted Portfolio = (Average Variance of Individual Stocks) + n 1 (1 - )(Average covariance between the stocks) n B) C) D) Use the table for the question(s) below. Consider the following covariances between securities: Duke Microsoft Wal-Mart Duke 0.0568 -0.0193 0.0037 Microsoft -0.0193 0.2420 0.1277 Wal-Mart 0.0037 0.1277 0.1413 15) What is the variance on a portfolio that has \$2000 invested in Duke Energy, \$3000 invested in Microsoft, and \$5000 invested in Wal-Mart stock? Answer: COV Duke Microsoft Wal-Mart Duke 0.0568 -0.0193 0.0037 Microsoft -0.0193 0.2420 0.1277 Wal-Mart 0.0037 0.1277 0.1413 Weights XiXj XDuke 0.2 XDuke 0.3 0.5 XMicrosoft XWal-Mart 0.04 0.06 0.1 XMicrosoft 0.06 0.09 0.15 XWal-Mart 0.1 0.15 0.25 XiXjCOV(I,j) Duke Duke 0.002272 Microsoft -0.00116 Wal-Mart 0.000367 Var(P) = Microsoft -0.00116 0.021776 0.019153 Wal-Mart 0.000367 0.019153 0.035318 0.096086 Variance of a portfolio = ∑ ∑ x x Cov( R , R ) ij i i j j 11.4 Risk Versus Return: Choosing an Efficient Portfolio 16) Which of the following statements is false? A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that isbetter in terms of both expected return and volatility. B) We can rule out inefficient portfolios because they represent inferior investment choices. C) The volatility of the portfolio will differ, depending on the correlation between the secu...
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## This document was uploaded on 02/02/2014.

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