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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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