FIN 320 SPRING 2024 Problem Set 6
.pdf
keyboard_arrow_up
School
Emory University *
*We aren’t endorsed by this school
Course
320
Subject
Economics
Date
May 3, 2024
Type
Pages
15
Uploaded by MagistrateJay285
1.
Award: 10.00 points
2.
Award: 10.00 points
To convince investors to accept greater volatility, you must:
decrease the risk premium.
increase the risk premium.
decrease the real return.
decrease the risk-free rate.
increase the risk-free rate.
References
Multiple Choice
Learning Objective: 12-03 Discuss the historical risks
on various important types of investments.
Difficulty: 1 Basic
Section: 12.3 Average Returns: The First Lesson
Standard deviation is a measure of which one of the following?
Average rate of return
Volatility
Probability
Risk premium
Real returns
References
Multiple Choice
Learning Objective: 12-03 Discuss the historical risks
on various important types of investments.
Difficulty: 1 Basic
Section: 12.4 The Variability of Returns: The Second
Lesson
3.
Award: 10.00 points
4.
Award: 10.00 points
Inside information has the least value when financial markets are:
weak form efficient.
semiweak form efficient.
semistrong form efficient.
strong form efficient.
inefficient.
References
Multiple Choice
Learning Objective: 12-04 Explain the implications of
market efficiency.
Difficulty: 1 Basic
Section: 12.6 Capital Market Efficiency
Which one of the following statements related to market efficiency tends to be supported by current evidence?
It is easy for investors to earn abnormal returns.
Short-run price movements are easy to predict.
Markets are most likely only weak form efficient.
Mispriced stocks are easy to identify.
Markets tend to respond quickly to new information.
References
Multiple Choice
Learning Objective: 12-04 Explain the implications of
market efficiency.
Difficulty: 1 Basic
Section: 12.6 Capital Market Efficiency
5.
Award: 10.00 points
6.
Award: 10.00 points
During the past five years, KwonCo.'s stock earned annual returns of 7 percent, 13 percent, 19 percent, −
8 percent, and 15 percent. Suppose the average inflation rate over this time period was 2.6 percent and the average T-bill rate was 3.1 percent.
Based on this information, what was the average nominal risk premium?
6.6%
6.1%
9.2%
1.2%
3.5%
Average return = (.07 + .13 + .19 −
.08 + .15)/5
Average return = .092, or 9.2%
Average nominal risk premium = 9.2% −
3.1%
Average nominal risk premium = 6.1%
References
Multiple Choice
Learning Objective: 12-01 Calculate the return on an
investment.
Difficulty: 2 Intermediate
Section: 12.3 Average Returns: The First Lesson
A stock experienced returns of 5 percent, −
17 percent, and 15 percent during the last three years. What is the standard deviation of the stock's returns for the three-year period?
16.37%
13.37%
48.86%
5.98%
2.68%
Average return = (.05 −
.17 + .15)/3
Average return = .0100, or 1%
σ = {[1/(3 − 1)][(.05 − .01)
2
+ (−.17 − .01)
2
+ (.15 − .01)
2
]}
.5
σ = .1637, or 16.37%
References
Multiple Choice
Learning Objective: 12-03 Discuss the historical risks
on various important types of investments.
Difficulty: 2 Intermediate
Section: 12.4 The Variability of Returns: The Second
Lesson
7.
Award: 10.00 points
8.
Award: 10.00 points
A stock had annual returns of 7 percent, −
28 percent, 13 percent, and 23 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent.
3.75; 17.46
3.75; 1.72
17.75; 4.27
17.75; 17.46
3.75; 4.27
Arithmetic average = (.07 −
.28 + .13 + .23)/4
Arithmetic average = .0375, or 3.75%
Geometric return = [1.07(.72)(1.13)(1.23)]
.25
− 1
Geometric return = .0172, or 1.72%
References
Multiple Choice
Learning Objective: 12-01 Calculate the return on an
investment.
Difficulty: 2 Intermediate
Section: 12.5 More about Average Returns
The most important reason to diversify a portfolio is to:
increase both returns and risks.
eliminate all risks.
eliminate asset-specific risk.
eliminate systematic risk.
lower both returns and risks.
References
Multiple Choice
Learning Objective: 13-02 Discuss the impact of
diversification.
Difficulty: 1 Basic
Section: 13.5 Diversification and Portfolio Risk
9.
Award: 10.00 points
Consider the following information on three stocks:
State of Economy
Probability of State of
Economy
Rate of Return if State Occurs
Stock A
Stock B
Stock C
Boom
.15
.27
.15
.11
Normal
.65
.14
.11
.09
Bust
.20
−
.19
−
.06
.05
A portfolio is invested 45 percent each in Stock A and Stock B, and 10 percent in Stock C. The expected T-bill rate is 3.2 percent. What is the expected risk premium on the portfolio?
5.55%
12.38%
1.67%
4.29%
8.75%
E(R
P
)
Boom = .45(.27) + .45(.15) + .10(.11) = .2000
E(R
P
)
Normal = .45(.14) + .45(.11) + .10(.09) = .1215
E(R
P
)
Bust = .45(–.19) + .45(–.06) + .10(.05) = −.1075
E(R
P
) = .15(.2000) + .65(.1215) + .20(−.1075)
E(R
P
) = .0875, or 8.75%
RP
P
= .0875 − .032
RP
P
= .0555, or 5.55%
References
Multiple Choice
Learning Objective: 13-01 Show how to calculate
expected returns, variance, and standard deviation.
Difficulty: 2 Intermediate
Section: 13.1 Expected Returns and Variances
10.
Award: 10.00 points
If the economy is normal, Taeana Wear stock is expected to return 9.3 percent. If the economy falls into a recession, the stock's return is projected at a negative 6.3 percent. The probability of a normal economy is 74 percent. What is the variance of
the returns on this stock?
.001802
.007432
.004682
.006084
.031962
E(
r
) = .74(.093) + .26(
−
.063)
E(
r
) = .0524, or 5.24%
σ
2
= .74(.093 − .0524)
2
+ .26(−.063 − .0524)
2
σ
2
= .004682
References
Multiple Choice
Learning Objective: 13-01 Show how to calculate
expected returns, variance, and standard deviation.
Difficulty: 2 Intermediate
Section: 13.1 Expected Returns and Variances
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
- Access to all documents
- Unlimited textbook solutions
- 24/7 expert homework help
Related Questions
Suppose one uses the single-index model to estimate characteristics of securities.Which of the following statements is correct?
(a)The covariances between securities are the same as in the data.
(b)The variance of a portfolio is the same as in the data.
(c)The expected return and the variance of a security are the same as in the data.
(d)The expected return,variance and covariances of a security are the same as in the da
arrow_forward
Need all four questions
arrow_forward
3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions.
(a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset?
(b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?
arrow_forward
Required information
[The following information applies to the questions displayed below.]
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government
and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability
distributions of the risky funds are:
Stock fund (5)
Bond fund (B)
The correlation between the fund returns is 0.15.
Expected
Return
158
98
Required:
Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky
portfolio. (Do not round intermediate calculations and round your final answers to 2 decimal places.)
Answer is complete but not entirely correct.
15.55%
84.45 X %
9.93 X %
25.52 %
Portfolio invested in the stock
Portfolio invested in the bond
Expected return
Standard deviation
Standard
Deviation
32%
23%
4
arrow_forward
QUESTION 2
Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively.
Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases.
The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases.
The standard deviation of the portfolio returns increases as the coefficient of correlation increases.
The standard deviation of the portfolio returns decreases as the coefficient of correlation increases.
The standard deviation of the portfolio returns increases as the coefficient of correlation decreases.
arrow_forward
course: advanced microeconomics
arrow_forward
Which of the following statements regarding risk objectives for an investor is incorrect.
a) Institututional investors risk objectives must include downside risk measure(s)
b) Risk measures could be absolute or relative risk measure.
c)Institutional investors risk objectives must consider the willingness and the ability to take risk.
d) Risk objectives can include more than a single constraints.
e) Retail investors risk objectives must consider the willingness and the ability to take risk.
arrow_forward
None
arrow_forward
Sh.11.
arrow_forward
10. Which one of the following measures may be used to measure the risk of an investment on
its own?
a) Expected return of the investment.
b) Expected utility of the investment for an investor.
c) Standard deviation of the possible outcomes of the investment.
d) The Bernoullian utility function's value of a good investment outcome.
arrow_forward
Exercise 9.2 (start-up and venture capitalist exit strategy). There are three periods, t = 0, 1, 2. The rate of interest in the economy is equal to 0, and ev- eryone is risk neutral. A start-up entrepreneur with initial cash A and protected by limited liability wants to invest in a fixed-size project. The cost of invest- ment, incurred at date 0, is I > A. The project yields, at date 2, R > 0 with probability p and 0 with prob- ability 1 − p. The probability of success is p = pH if the entrepreneur works and p = pL = pH − ∆p (∆p > 0) if the entrepreneur shirks. The entrepre- neur’s effort decision is made at date 0. Left unmon- itored, the entrepreneur obtains private benefit B if she shirks and 0 otherwise. If monitored (at date 0), the private benefit from shirking is reduced to b B. There is a competitive industry of venture capi- talists (monitors). A venture capitalist (general part- ner) has no fund to…
arrow_forward
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond
fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are
as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12 15 The correlation between
the fund returns is 0.10. a-1. What are the investment proportions in the minimum - variance portfolio of the two risky
funds. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.) Portfolio invested
in the stock Portfolio invested in the bond a-2. What are the expected value and standard deviation of the minimum
variance portfolio rate of return? (Do not round intermediate calculations. Enter your answers as percentage rounded to
2 decimals.) Expected return % Standard deviation %
arrow_forward
Micro Question 1
Please help to solve this. Thank you
arrow_forward
5.
You have been hired as a portfolio manager for a fancy hedge fund. Your first job is
to invest $100,000 in a portfolio of two assets. The first asset is a safe asset with a certain
return of 5%. The second asset is shares of a dying video-game store that has become
popular with retail investors, it has a 20% expected rate of return, but the standard
deviation of this return is 10%. Your manager wants a portfolio with as high a rate of
return as possible while keeping the standard deviation at or below 4%. How much of the
fund's money do you invest in the safe asset?
arrow_forward
19. An individual has initial wealth Wo = 3 and has the opportunity to invest some quantity
of money x in an extremely risky corporate bond. With probability p= 1/4, the bond
will be worth 10x at maturity. With probability 1 – p, it will be worth zero. The
individual's utility function over final wealth is u(W) = W0.5. What is the level of
investment x that maximizes expected utility?
(а) 0
(b) 1
(c) 4/3
(d) V3
(e) 2
arrow_forward
Please help me fix c. Thanks!
arrow_forward
16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A.
17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential.
18. The return earned on a risk free portfolio must be equal to the risk free interest rate.
19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio.
20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance.
21. The market portfolio of all available assets is the supply of risky assets.
22. An arbitrage opportunity is an…
arrow_forward
BNQ12.2
Case:
Suppose an Investor is concerned about a Business Choice in which there are
3 prospects the Probabilities and Returns are given below:
Probability
0.4
0.3
0.3
Return
$100
30
-30
Question:
What is the Expected Value of the Uncertain Investment?
arrow_forward
Suppose you identify 50 possible investments whose payoffs are completely independent of one another. All the investments have the
same expected value and standard deviation. You have $5,000 to invest. In terms of risk, would the benefit of spreading your $5,000
across all 50 investments be the same, greater, or smaller compared with dividing your funds between just two investments?
OYes. The gains from spreading your investments would be larger if you spread the $5000 across 50 investments.
No. Because in this case diversification does not help to spread risk, it doesn't matter how many investments you spread your
$5,000 across.
No. Because the payoffs from these investments are independent, it doesn't matter how many investments you spread your
$5,000 across, as there is no benefit in terms of reduced risk.
O Yes. Because the payoffs from these investments are negatively correlated with one another, spreading your $5,000 across a
targer number of investments reduces your risk.
arrow_forward
Discuss: i) diversifiable risk; ii) market risk; iii) systematic risk iv) unsystematic risk;
arrow_forward
Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? (see attached chart)
arrow_forward
5. Shift-in-charge Nazar Al Rushdy: Nazar is pessimistic about the market price. What is
your guidance for Nazar?
The decision to employ decision trees in crucial situations has been taken by Salem Al Harthi,
the plant manager. The table below presents data on demand for a duration of 6 hours along
with their respective probabilities. The first row of the table provides the probability of demand
for the initial three hours when a leak occurs, denoted in parentheses. Subsequently, the
following three rows indicate the probabilities of high, medium, and low demand for the
succeeding three hours. To illustrate, if the initial 3-hour market price was low, the probabilities
of high demand, medium demand, and low demand in the next three hours are 0.2, 0.3, and 0.5,
respectively.
Market price High
Market price Medium
Initial 3-hrs (0.2)
Initial 3-hrs (0.5)
Market price Low
Initial 3-hrs (0.3)
High demand (next (0.5)
(0.4)
(0.2)
3 hrs)
Medium
demand (0.3)
(0.2)
(0.3)
(next 3 hours)
Low demand…
arrow_forward
Only typed answer and give fast answer i will give you upvote
arrow_forward
Question 2
.
Full explain this question and text typing work only
arrow_forward
WITH SOLUTION PLS
arrow_forward
Subject:accounting
arrow_forward
5,
arrow_forward
None
arrow_forward
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third
is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows:
Standard Deviation
Expected Return
23%
Stock fund (S)
29%
Bond fund (B)
14
17
The correlation between the fund returns is 0.12.
a-1. What are the investment proportions in the minimum-variance portfolio of the two risky funds? (Do not round intermediate
calculations. Enter your answers as decimals rounded to 4 places.)
Portfolio invested in the stock
Portfolio invested in the bond
a-2. What are the expected value and standard deviation of the minimum-variance portfolio rate of return? (Do not round intermediate
calculations. Enter your answers as decimals rounded to 4 places.)
Rate of Return
Expected return
Standard deviation
arrow_forward
Consider an investment that pays off $700 or $1,600 per $1,000 invested with equal probability. Suppose you have $1,000 but are
willing to borrow to increase your expected return. What would happen to the expected value and standard deviation of the
investment if you borrowed an additional $1,000 and invested a total of $2,000? What if you borrowed $2,000 to invest a total of
$3,000?
Instructions: Fill in the table below to answer the questions above. Enter your responses as whole numbers and enter percentage
values as percentages not decimals (.e., 20% not 0.20). Enter a negative sign (-) to indicate a negative number if necessary.
Invest $1,000
Invest $2,000
Invest $3,000
Expected Value Percent Increase Standard Deviation
1150
S
28 %
$
8
%
$
Expected Return
N/A
Doubled
Tripled
:
#
arrow_forward
SEE MORE QUESTIONS
Recommended textbooks for you
Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning
Related Questions
- Suppose one uses the single-index model to estimate characteristics of securities.Which of the following statements is correct? (a)The covariances between securities are the same as in the data. (b)The variance of a portfolio is the same as in the data. (c)The expected return and the variance of a security are the same as in the data. (d)The expected return,variance and covariances of a security are the same as in the daarrow_forwardNeed all four questionsarrow_forward3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?arrow_forward
- Required information [The following information applies to the questions displayed below.] A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: Stock fund (5) Bond fund (B) The correlation between the fund returns is 0.15. Expected Return 158 98 Required: Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Answer is complete but not entirely correct. 15.55% 84.45 X % 9.93 X % 25.52 % Portfolio invested in the stock Portfolio invested in the bond Expected return Standard deviation Standard Deviation 32% 23% 4arrow_forwardQUESTION 2 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient of correlation increases. The standard deviation of the portfolio returns decreases as the coefficient of correlation increases. The standard deviation of the portfolio returns increases as the coefficient of correlation decreases.arrow_forwardcourse: advanced microeconomicsarrow_forward
- Which of the following statements regarding risk objectives for an investor is incorrect. a) Institututional investors risk objectives must include downside risk measure(s) b) Risk measures could be absolute or relative risk measure. c)Institutional investors risk objectives must consider the willingness and the ability to take risk. d) Risk objectives can include more than a single constraints. e) Retail investors risk objectives must consider the willingness and the ability to take risk.arrow_forwardNonearrow_forwardSh.11.arrow_forward
- 10. Which one of the following measures may be used to measure the risk of an investment on its own? a) Expected return of the investment. b) Expected utility of the investment for an investor. c) Standard deviation of the possible outcomes of the investment. d) The Bernoullian utility function's value of a good investment outcome.arrow_forwardExercise 9.2 (start-up and venture capitalist exit strategy). There are three periods, t = 0, 1, 2. The rate of interest in the economy is equal to 0, and ev- eryone is risk neutral. A start-up entrepreneur with initial cash A and protected by limited liability wants to invest in a fixed-size project. The cost of invest- ment, incurred at date 0, is I > A. The project yields, at date 2, R > 0 with probability p and 0 with prob- ability 1 − p. The probability of success is p = pH if the entrepreneur works and p = pL = pH − ∆p (∆p > 0) if the entrepreneur shirks. The entrepre- neur’s effort decision is made at date 0. Left unmon- itored, the entrepreneur obtains private benefit B if she shirks and 0 otherwise. If monitored (at date 0), the private benefit from shirking is reduced to b B. There is a competitive industry of venture capi- talists (monitors). A venture capitalist (general part- ner) has no fund to…arrow_forwardA pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12 15 The correlation between the fund returns is 0.10. a-1. What are the investment proportions in the minimum - variance portfolio of the two risky funds. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.) Portfolio invested in the stock Portfolio invested in the bond a-2. What are the expected value and standard deviation of the minimum variance portfolio rate of return? (Do not round intermediate calculations. Enter your answers as percentage rounded to 2 decimals.) Expected return % Standard deviation %arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Managerial Economics: Applications, Strategies an...EconomicsISBN:9781305506381Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. HarrisPublisher:Cengage Learning
Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning