Provide answers and solutions:

1} You are given the following information about an asset. i] Using 36 years of data1 the average annual asset return is 10%. ii} The volatility of the asset's return, over the same time period, was estimated to he 3%. iii] The distributions of each year's returns are identicallyr distributed and independent from each other year's returns. Calculate the lower bound of the 95% confidence interval for the asset's annual expected return, using the approximation formula given in Corporate Finance. {A} 1.0% {a} 2.5% (e) 4.5% {D} 5.5% {E} 5.5% 2) You are given the following information about a portfolio with four assets. Market Value Covariance of asset's return Asset of Asset with the portfolio return I 40,000 0.15 II 20,000 -0.10 III 10,000 0.20 IV 30,000 -0.05 Calculate the standard deviation of the portfolio return. (A) 4.50% (B) 13.2% (C) 20.0% (D) 21.2% (E) 44.7%3} You are given the following information about the annual returns of two stocks, X and I": i] The expected returns of A" and F are E[Rx] = 10% and E[Rr] = 15%. ii} The volatilities of the retums are P} =18% and V}. = 211%. iii] The correlation coefcient of the returns for these taro stocks is 1125. iv] The expected return for a certain portfolio, consisting only of stocks X and 1", is 12%. Calculate the volatility of the portfolio return. (.5) 15.58% {B} 12.55% to} 13.55% {D} 14.95% (E) 15.91% 4) You are given the following information about a portfolio consisting of stocks X, Y, and Z: Stock Investment Expected Return X 10,000 8% Y 15,000 12% Z 25,000 16% Calculate the expected return of the portfolio. (A) 10.8% (B) 11.4% (C) 12.0% (D) 12.6% (E) 13.2%5) You are given the following set of diagrams for a two-stock portfolio, with expected return on the vertical axis and volatility on the horizontal axis. These diagrams are meant to help investors identify the set of efficient portfolios. Identify the diagram demonstrating the highest correlation between the two stocks. (A) (B) Volatility hiandand ervinion) (C) (D) (E)6) You are given the following information about the four distinct portfolios: Portfolio Expected Return Volatility P 3% 10% 5% 10% R 5% 15% S 7% 20% Determine which two of the four given portfolios are NOT efficient. (A) P and Q) (B) P and R (C) P and S (D) Q and R (E) Q and S7) Consider a portfolio of four stocks as displayed in the following table: Stock Weight Beta 0.1 1.3 2 0.2 -0.6 3 0.3 4 0.4 1.1 Assume the expected return of the portfolio is 0.12, the annual effective risk-free rate is 0.05, and the market risk premium is 0.08. Assuming the Capital Asset Pricing Model holds, calculate , A) 0.80 B) 1.06 C) 1.42 D) 1.83 E) 2.178) You are given the following information about a two-asset portfolio: (i) The Sharpe ratio of the portfolio is 0.3667. (ii) The annual effective risk-free rate is 4%. (iii) If the portfolio were 50% invested in a risk-free asset and 50% invested in a risky asset X, its expected return would be 9.50%. Now, assume that the weights were revised so that the portfolio were 20% invested in a risk-free asset and 80% invested in risky asset X. Calculate the standard deviation of the portfolio return with the revised weights. (A) 6.0% (B) 6.2% (C) 12.8% (D) 15.0% (E) 24.0%9) You are given the following information about an equally-weighted portfolio of n stocks: (1) For each individual stock in the portfolio, the variance is 0.20. (ii) For each pair of distinct stocks in the portfolio, the covariance is 0.10. Determine which graph displays the variance of the portfolio as a function of n. (A) "(B) IC. (C) (D) (E)10) You are given the following information about three stocks (X, Y, and Z) in a portfolio: (i) The covariance matrix for each stock with each other stock is given in the following table: X Y Z X 0.040 -0.018 0.016 Y -0.018 0.090 -0.021 Z 0.016 -0.021 0.010 (ii) The weighting of each stock in the portfolio is as follows: Stock Weighting X 30% V 20% Z 50% Calculate the variance of this portfolio. (A) 0.0081 (B) 0.0089 (9) 0.0123 (D) 0.0902 (E) 0.094411) You are given the following information about a portfolio that has two equally- weighted stocks, P and Q. (i) The economy over the next year could be good or bad with equal probability. (ii) The returns of the stocks can vary as shown in the table below: Return when economy Return when economy Stock is good is bad 10% -2% Q 18% -5% Calculate the volatility of the portfolio return. (A) 1.80% (B) 6.90% (C) 7.66% (D) 8.75% (E) 13.42%12) Which of following statements represents the homogeneous expectations assumption that underlies the Capital Asset Pricing Model (CAPM)? (A) Investors can only buy and sell at competitive market prices. (B) Investors can borrow or lend at the risk-free interest rate. (C) There are no taxes or transaction costs. (D) All investors have identical estimates for the volatilities, correlations, and expected returns of securities. (E) Investors only hold portfolios that yield maximum expected return for a given level of volatility