PRACTICE QUESTIONS - CHAP 05 Practice Question 1 Asset A generates 5% as returns. Asset B generates 8% as returns. Asset C generates 11% as returns. You invest 20% in A, 30% in B and the remaining of your money in C 1 What is the expected return on your portfolio? 2 Imagine now that the above mentioned retums are generated in an optimistic scenario having a probability 40% to occur. In a pessimistic scenario with 60% of chances to happen, these returns decrease by 7% for each individual asset. What is now the expected return on this portfolio in this case? Practice Question 2 Clarion Investment Advisors is evaluating the distribution of returns for a new stock investment and has come up with five possible rates of return for the coming year. Their associated probabilities are as follows: Rate of Return on Investment Chance (Probability) of Occurrence 1 chance in 10 (10%) 2 chances in 10 (20%) 4 chances in 10 (40%) 2 chances in 10 (20%) I chance in 10 (10%) -20% 0% 15% 30% 50% a. What expected rate of return might they expect to realize from the investment? b. What is the risk of the investment as measured using the standard deviation of possible future rates of return? Practice Question 3 Fill in the following table with the retums. Time Price Return 2018 125 2017 121 2016 117 2015 110 2014 100 Practice Question 4 Asset A and B have the following features and are used to build an equally weighted portfolio Assets Expected returns Standard deviation of returns Asset A 15% 25% Asset B 25% 35% a. Compute the expected return of the portfolio b. Compute the standard deviation of the portfolio knowing that returns of A and B have a correlation coefficient of 0.8 Practice Question 5 Assume that an asset provides 10% of return with a systematic risk of 1.5. Knowing that the risk-free rate of return is 1%, assess the market risk premium