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Chap 11 Questions

This document contains 12 multiple choice questions regarding portfolio investment and management. The questions cover topics such as calculating portfolio returns and weights given stock price changes, estimating expected returns and volatility of individual stocks and portfolios, calculating covariance and correlation between stocks, determining the portfolio mix that minimizes risk, and calculating expected returns and risk of portfolios involving long and short positions in different stocks.

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59 views3 pages

Chap 11 Questions

This document contains 12 multiple choice questions regarding portfolio investment and management. The questions cover topics such as calculating portfolio returns and weights given stock price changes, estimating expected returns and volatility of individual stocks and portfolios, calculating covariance and correlation between stocks, determining the portfolio mix that minimizes risk, and calculating expected returns and risk of portfolios involving long and short positions in different stocks.

Uploaded by

shehry .C
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chap 11

Question no 1

You are considering how to invest part of your retirement savings. You have decided to put $200,000
into three stocks: 50% of the money in GoldFinger (currently $25/share), 25% of the money in
Moosehead (currently $80/share), and the remainder in Venture Associates (currently $2/share). If
GoldFinger stock goes up to $30/share, Moosehead stock drops to $60/share, and Venture Associates
stock rises to $3 per share,
a. What is the new value of the portfolio?
b. What return did the portfolio earn?
c. If you don’t buy or sell shares after the price change, what are your new portfolio weights?

Question no 2

You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5000 shares
of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-
Palmolive are, respectively, $500, $20, $100 and 12%, 10%, 8%.
a. What are the portfolio weights of the three stocks in your portfolio?
b. What is the expected return of your portfolio?
c. Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by $13.
What are the new portfolio weights?
d. Assuming the stocks’ expected returns remain the same, what is the expected return of the portfolio
at the new prices?

Question no 3

Consider a world that only consists of the three stocks shown in the following table:

Stock Total Number of shares Current price per share Expected return
outstanding
First Bank 100 million $100 18%
Fast Mover 50 million $120 12%
Funny Bone 200 million $30 15%

a. Calculate the total value of all shares outstanding currently.


b. What fraction of the total value outstanding does each stock make up?
c. You hold the market portfolio, that is, you have picked portfolio weights equal to the answer to part
b (that is, each stock’s weight is equal to its contribution to the fraction of the total value of all stocks).
What is the expected return of your portfolio?

Question no 4

There are two ways to calculate the expected return of a portfolio: either calculate the expected return
using the value and dividend stream of the portfolio as a whole or calculate the weighted average of the
expected returns of the individual stocks that make up the portfolio. Which return is higher?
Question no 5

Using the data in the following table, estimate (a) the average return and volatility for each stock, (b) the
covariance between the stocks, and (c) the correlation between these two stocks.

Year 2010 2011 2012 2013 2014 2015


Stock A -10% 20% 5% -5% 2% 9%
Stock B 21% 7% 30% -3% -8% 25%

Question no 6

Using your estimates from problem 5, calculate the volatility (standard deviation) of a portfolio that is
70% invested in stock A and 30% invested in stock B.

Question no 7

Using the data from Table 11.3, what is the covariance between the stocks of Alaska Air and Southwest
Airlines?

Question no 8

Suppose two stocks have a correlation of 1. If the first stock has an above average return this year, what
is the probability that the second stock will have an above average return?

Question no 9

Suppose Avon and Nova stocks have volatilities of 50% and 25%, respectively, and they are perfectly
negatively correlated. What portfolio of these two stocks has a zero risk?

Question no 10

What is the volatility (standard deviation) of an equally weighted portfolio of stocks within an industry in
which the stocks have a volatility of 50% and a correlation of 40% as the portfolio becomes arbitrarily
large?

Question no 11

Suppose Intel’s stock has an expected return of 26% and a volatility of 50%, while Coca-Cola’s has an
expected return of 6% and volatility of 25%. If these two stocks were perfectly negatively correlated
(i.e., their correlation coefficient if -1),

a. Calculate the portfolio weights that remove all risk.

b. if there are no arbitrage opportunities, what is the risk-free rate of interest in this economy?

Question no 12

Suppose Johnson & Johnson and the Walgreen Boots Alliance have expected returns and volatilities
shown below, with a correlation of 22%.

E[R] SD[R]
Johnson & Johnson 7% 16%
Walgreen Company 10% 20%

12-A. Calculate (a) the expected return and (b) the volatility (standard deviation) of a portfolio that is
equally invested in Johnson & Johnson’s and Walgreen’s stocks.

11-B. if the correlation between Johnson & Johnson’s and Walgreen’s stock were to increase,

a. Would the expected return of the portfolio rise or fall?


b. Would the volatility of the portfolio rise or fall?

12-C Calculate (a) the expected return and (b) the volatility (standard deviation) of a portfolio that
consists of a long position of $10,000 in Johnson & Johnson and a short position of $ 2000 in Walgreens.

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