a. Commonwealth Bank of Australia (CBA) has reported a 99% Value at Risk (VaR) of 3.09% over a 1268 trading period. What does this mean? 

b. Why do some investors prefer to use Lower Partial Standard Deviations (LPSD) as compared to the standard deviation? 

c. Why will the standard deviation not be a good measure of risk when returns are negatively skewed? 

d. What are the risk implications for an investor for a returns series that exhibits fat tails? 

e. A price weighted index places more weight on stocks with a higher price, whilst a value weighted index places more weight on stocks with a higher market capitalization. Discuss. 

Price weighted indices have been criticized because they introduce a downward bias by reducing the weight of growing companies whose stock split. What does this mean and why does the underweighting occur? 

 

What should be the risk premium and return on a stock with a Beta of zero under the Capital Asset Pricing Model (CAPM)? What about the risk premium and return on a stock with a Beta of 1? 

h. In a world of certainty, investors will always invest in the asset with the highest return. In the real world, investors hold a diversified portfolio of securities. Why is this the case? 

i. Theoretically, returns on stocks or assets can be negatively correlated. In the real world, however, we usually encounter only positive correlations. Why may this be the case? 

j. It is said that the key factor that determines the risk of stocks in a large portfolio is not the risk of the individual assets but the covariance's of the securities in the portfolio. What does this mean? 

k. What do you expect the correlation between Gold and the S&P 500 to be based on theoretical arguments? 

l. Using the Excel file Gold/Market provided, find the correlation between Gold and the S&P 500 index. (attach your completed excel file as part of your submission).

m. What is the implication of this correlation for an investor who holds the S&P 500 and wants to add Gold to his/her portfolio?