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Exercises Lesson Portfolio Moodle 1

The document contains 9 multiple choice questions that test understanding of portfolio theory concepts such as mean return, variance, standard deviation, and correlation. For each question, the relevant financial data and calculations are provided, and the answer is explained. Key concepts covered include calculating returns, variances, covariances, and properties of portfolios consisting of multiple stocks.

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David Businelli
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883 views

Exercises Lesson Portfolio Moodle 1

The document contains 9 multiple choice questions that test understanding of portfolio theory concepts such as mean return, variance, standard deviation, and correlation. For each question, the relevant financial data and calculations are provided, and the answer is explained. Key concepts covered include calculating returns, variances, covariances, and properties of portfolios consisting of multiple stocks.

Uploaded by

David Businelli
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Exercises

1) Who first developed portfolio theory?


A) Merton Miller
B) Richard Brealey
C) Franco Modigliani
D) Harry Markowitz

Answer: D

2) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their stock
returns for the past three years were as follows: FC: −5 percent, 15 percent, 20 percent; MC: 8
percent, 8 percent, 20 percent.
Calculate the mean return for each company.
A) FC: 12 percent; MC: 6 percent
B) FC: 10 percent; MC: 12 percent
C) FC: 20 percent; MC: 32 percent
D) None of the options are correct.

Answer: B
Explanation: R(FC) = ( −5 + 15 + 20)/3 = 10 percent; R(MC) = (8 + 8 + 20)/3 = 12%.

3) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their stock
returns for the past three years were as follows: FC: −5 percent, 15 percent, 20 percent; MC: 8
percent, 8 percent, 20 percent.
Calculate the variances of returns for FC and MC. (Ignore the correction for the loss of a degree of
freedom set out in the text.)
A) FC: 100.00; MC: 256.00
B) FC: 350.00; MC: 96.00
C) FC: 116.67; MC: 32.00
D) FC: 48.00; MC: 175.00

Answer: C
Explanation: Var(FC) = [( −5 − 10)^2 + (15 − 10)^2 + (20 − 10)^2]/3 = 116.67.
Var(MC) = [(8 − 12)^2 + (8 − 12)^2 + (20 − 12)^2]/3 = 32.

4) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their stock
returns for the past three years were as follows: FC: −5%, 15 percent, 20 percent; MC: 8 percent, 8
percent, 20 percent.
Calculate the covariance between the returns of FC and MC. (Ignore the correction for the loss of a
degree of freedom set out in the text.)
A) 60
B) 80
C) 40
1
D) 100

Answer: C
Explanation: [(−5 − 10)(8 − 12) + (15 − 10)(8 − 12) + (20 − 10)(20 − 12)]/3 = 40.

5) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their stock
returns for the past three years were as follows: FC: −5 percent, 15 percent, 20 percent; MC: 8
percent, 8 percent, 20 percent.
Calculate the standard deviations of returns for FC and MC. (Ignore the correction for the loss of a
degree of freedom set out in the text.)
A) FC: 10.8 percent; MC: 5.7 percent
B) FC: 18.7 percent; MC: 9.8 percent
C) FC: 13.2 percent; MC: 6.9 percent
D) FC: 6.9 percent; MC: 13.2 percent

Answer: A
Explanation: Var(FC) = [( −5 − 10)^2 + (15 − 10)^2 + (20 − 10)^2]/3 = 116.67.
Var(MC) = [(8 − 12)^2 + (8 − 12)^2 + (20 − 12)^2]/3 = 32.
Standard deviation (FC) = 116.7^0.5 = 10.8%.
Standard deviation (MC) = 32^0.5 = 5.7%.

6) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their stock
returns for the past three years were as follows: FC: −5 percent, 15 percent, 20 percent; MC: 8
percent, 8 percent, 20 percent.
Calculate the correlation coefficient between the returns of FC and MC.
A) 0.000
B) −0.655
C) +0.655
D) +0.500

Answer: C
Explanation: Correlation coefficient = covariance/[(S.D.(FC)) × (S.D.(MC))] = 40/(10.8 × 5.7) =
+0.655.

7) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their stock
returns for the past three years were as follows: FC: -5 percent, 15 percent, 20 percent; MC: 8
percent, 8 percent, 20 percent. If FC and MC are combined into a portfolio with 50 percent of the
funds invested in each stock, calculate the expected return on the portfolio.
A) 12 percent
B) 10 percent
C) 11 percent
D) 9 percent

Answer: C
Explanation: Rp = (10)(0.5) + (12)(0.5) = 11%.
2
8) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their
stock returns for the past three years were as follows: FC: −5 percent, 15 percent, 20 percent;
MC: 8 percent, 8 percent, 20 percent. What is the variance of a portfolio with 50 percent of the
funds invested in FC and 50 percent in MC? (Ignore the correction for the loss of a degree of
freedom set out in the text.)
A) 85.75
B) 111.50
C) 55.75
D) 57.17

Answer: D
Explanation: Var(FC) = [(−5 − 10)^2 + (15 − 10)^2 + (20 − 10)^2]/3 = 116.67.
Var(MC) = [(8 − 12)^2 + (8 − 12)^2 + (20 − 12)^2]/3 = 32.
Var(P) = (0.5^2)(116.7) + (0.5^2)(32) + (2)(0.5)(0.5)(40) = 57.17.

9) Florida Company (FC) and Minnesota Company (MC) are both service companies. Their
stock returns for the past three years were as follows: FC: −5 percent, 15 percent, 20 percent;
MC: 8 percent, 8 percent, 20 percent. What is the standard deviation of a portfolio with 50
percent of the funds invested in FC and 50 percent in MC? (Ignore the correction for the loss of
a degree of freedom set out in the text.)
A) 10.6 percent
B) 14.4 percent
C) 9.3 percent
D) 7.6 percent

Answer: D
Explanation:
Var(FC) = [(−5 − 10)^2 + (15 − 10)^2 + (20 − 10)^2]/3 = 116.67.
Var(MC) = [(8 − 12)^2 + (8 − 12)^2 + (20 − 12)^2]/3 = 32.
Var(P) = (0.5^2)(116.7) + (0.5^2)(32) + (2)(0.5)(0.5)(40) = 57.17.
S.D. = (57.17)^0.5 = 7.6%.

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