Question
An investor has a portfolio of two assets A and B. The details are shown in the below table. Portfolio Details Asset Expected return Standard
An investor has a portfolio of two assets A and B. The details are shown in the below table.
Portfolio Details | |||||
Asset | Expected return | Standard deviation | Covariance (A, B) | Expected Portfolio Return | |
A | 0.02 | 0.4 | 0.12 | 0.08 | |
B | 0.06 | 0.8 |
Which one of the following statements is NOT correct?
a.
The portfolio weight in asset A is -50%.
b.
The asset A could represent a share or a bond.
c.
The portfolio has no diversification at all since the covariance between two assets is positive.
d.
The standard deviation of the portfolio is 1.14.
e.
The correlation of asset A and Bs returns is 0.375.
The security market line (SML) shows the relationship between beta and expected return.
The following graph shows stocks' betas () and expected returns ():
Assume that the CAPM holds and expectations of stocks' returns and betas are correctly measured.
Which statement is NOT correct?
a.
Stock E has a zero excess return (a zero alpha).
b.
Stock C has zero diversifiable risk.
c.
Rational investors should sell Stock B.
d.
Stock A is underpriced.
e.
The price of Stock D will fall, and the excess return of Stock D will rise.
The below three graphs show probability density functions (PDF) of three different random variables Red, Green and Blue. Let P1 be the unknown price of a stock in one year. P1 is a random variable. Let P0=1, so the share price now is $1. This one dollar is a constant, it is not a variable.
Which of the below statements is NOT correct?
a.
Blue is a stock's future price (P1), with a minimum value of zero.
b.
Green is a stock's continuously compounded return.
c.
Red is a stock's log gross discrete return (LGDR), with a minimum value of negative one.
d.
Red is log-normally distributed, and the mean is higher than the median.
e.
Blue is a stock's gross discrete return (GDR), with a minimum value of zero.
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