PORTFOLIO RISK AND RETURN: PART I

 Holding interval return is most applicable for a single, predefined holding interval.

 Multiperiod returns might be aggregated in some ways. Every return computation has particular functions for evaluating investments. Danger-averse traders make funding choices based mostly on the chance–return trade-off, maximizing return for a similar danger, and minimizing danger for a similar return. They might be involved, nonetheless, by deviations from a standard return distribution and from assumptions of economic markets’ operational effectivity.

 Traders are danger averse, and historic knowledge affirm that monetary markets value belongings for risk-averse traders.

 The danger of a two-asset portfolio relies on the proportions of every asset, their commonplace deviations and the correlation (or covariance) between the asset’s returns. Because the variety of belongings in a portfolio will increase the correlation amongst asset dangers turns into a extra vital determinate of portfolio danger.

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 Combining belongings with low correlations reduces portfolio danger.

 The 2-fund separation theorem permits us to separate choice making into two steps. In step one, the optimum dangerous portfolio and the capital allocation line are recognized, that are the identical for all traders. Within the second step, investor danger preferences allow us to discover a distinctive optimum investor portfolio for every investor.

 The addition of a risk-free asset creates portfolios which can be dominant to portfolios of dangerous belongings in all instances aside from the optimum dangerous portfolio.

PROBLEMS^[1]

1. An investor bought 100 shares of a inventory for $34.50 per share firstly of the quarter. If the investor offered all the shares for $30.50 per share after receiving a $51.55 dividend fee on the finish of the quarter, the holding interval return is closest to:
   1. 213.0 %.
   1. 211.6 %. C. 210.1 %.
2. An analyst obtains the next annual charges of return for a mutual fund:

• 14 %
  • 210 %
  • 22 %

The fund’s holding interval return over the three-year interval is closest to:

1. 0.18 %. B. 0.55 %. C. 0.67 %.
2. An analyst observes the next annual charges of return for a hedge fund:

• 22 %
  • 225 %
  • 11 %

The hedge fund’s annual geometric imply return is closest to:

1. 0.52 %. B. 1.02 %. C. 2.67 %.
2. Which of the next return calculating strategies is greatest for evaluating the annualized returns of a buy-and-hold technique of an investor who has made annual deposits to an account for every of the final 5 years?
3. Geometric imply return.
4. Arithmetic imply return.
5. Cash-weighted return.
6. An investor evaluating the returns of three just lately shaped exchange-traded funds gathers the next data:

The ETF with the best annualized price of return is:

1. ETF 1. B. ETF 2. C. ETF 3.
2. With respect to capital market idea, which of the next asset traits is least prone to affect the variance of an investor’s equally weighted portfolio?
   1. Return on the asset.
   1. Commonplace deviation of the asset.
   1. Covariances of the asset with the opposite belongings within the portfolio.
3. A portfolio supervisor creates the next portfolio:
4. If the correlation of returns between the 2 securities is 0.40, the anticipated commonplace deviation of the portfolio is closest to:
5. 10.7 %. B. 11.3 %. C. 12.1 %.
6. A portfolio supervisor creates the next portfolio:
7. Anticipated Commonplace
8. If the covariance of returns between the 2 securities is 20.0240, the anticipated commonplace deviation of the portfolio is closest to:
9. 2.4 %. B. 7.5 %. C. 9.2 %.
10. Use the next knowledge to reply Questions 9 and 10.
11. A portfolio supervisor creates the next portfolio:
12. If the usual deviation of the portfolio is 14.40%, the correlation between the 2 securities is the same as:
    • 21.0.
    • 0.0. C. 1.0.
13. If the usual deviation of the portfolio is 14.40%, the covariance between the 2 securities is the same as:
    • 0.0006. B. 0.0240. C. 1.0000.
14. Use the next knowledge to reply Questions 11 via 14.
15. An analyst observes the next historic geometric returns:
16. The actual price of return for equities is closest to:
    1. 5.4 %. B. 5.8 %. C. 5.9 %.
17. The actual price of return for company bonds is closest to:
    1. 4.3 %. B. 4.4 %. C. 4.5 %.
18. The danger premium for equities is closest to:
    1. 5.4 %. B. 5.5 %. C. 5.6 %.
19. The danger premium for company bonds is closest to:
    1. 3.5 %. B. 3.9 %. C. 4.0 %.
    2. With respect to buying and selling prices, liquidity is least prone to affect the:
       • Inventory value.
       • Bid-ask spreads.
       • Brokerage commissions.
    3. Proof of danger aversion is greatest illustrated by a risk-return relationship that’s:
       • Unfavorable.
       • Impartial. C. Constructive.
    4. With respect to risk-averse traders, a risk-free asset will generate a numerical utility that’s:
       • The identical for all people.
       • Constructive for risk-averse traders.
       • Equal to zero for danger looking for traders.
    5. With respect to utility idea, probably the most risk-averse investor could have an indifference curve with the:
       • Most convexity.
       • Smallest intercept worth.
       • Biggest slope coefficient.
    6. With respect to an investor’s utility operate expressed as U ¼ EðrÞ¹₂Aσ², which of the next values for the measure for danger aversion has the least quantity of riskaversion?
       • 24
       • 0
       • 4
    7. Use the next knowledge to reply Questions 20 via 23.
    8. A monetary planner has created the next knowledge for example the applying of utility idea to portfolio choice:
    9. A risk-neutral investor is most definitely to decide on:
       • Funding 1. B. Funding 2. C. Funding 3.
    10. If an investor’s utility operate is expressed as U ¼ EðrÞ2Aσ² and the measure for danger aversion has a worth of twenty-two, the risk-seeking investor is most definitely to decide on:
        • Funding 2. B. Funding 3. C. Funding 4.
    11. If an investor’s utility operate is expressed as U ¼ EðrÞ2Aσ² and the measure for danger aversion has a worth of two, the risk-averse investor is most definitely to decide on:
        • Funding 1. B. Funding 2. C. Funding 3.
        • If an investor’s utility operate is expressed as U ¼ EðrÞ2Aσ² and the measure for danger aversion has a worth of 4, the risk-averse investor is most definitely to decide on:
          • Funding 1. B. Funding 2. C. Funding 3.
        • With respect to the mean-variance portfolio idea, the capital allocation line, CAL, is the mix of the risk-free asset and a portfolio of all:
          • Dangerous belongings.
          • Fairness securities.
          • Possible investments.
        • Two particular person traders with completely different ranges of danger aversion could have optimum portfolios which can be:
          • Beneath the capital allocation line.
          • On the capital allocation line.
          • Above the capital allocation line.
        • Use the next knowledge to reply Questions ^[1] via 28.
        • A portfolio supervisor creates the next portfolio:
        • A. 25 %. B. 50 %. C. 75 %.
        • If the correlation of returns between the 2 securities is 20.15, the anticipated commonplace deviation of an equal-weighted portfolio is closest to:
          • 13.04 %. B. 13.60 %. C. 13.87 %.
        • If the 2 securities are uncorrelated, the anticipated commonplace deviation of an equalweighted portfolio is closest to:
          • 14.00 %. B. 14.14 %. C. 20.00 %.
        • Because the variety of belongings in an equally weighted portfolio will increase, the contribution of every particular person asset’s variance to the volatility of the portfolio:
          • Will increase.
          • Decreases.
          • Stays the identical.
        • With respect to an equally weighted portfolio made up of a lot of belongings, which of the next contributes probably the most to the volatility of the portfolio?
          • Common variance of the person belongings.
          • Commonplace deviation of the person belongings.
          • Common covariance between all pairs of belongings.
        • [1] . If the portfolio of the 2 securities has an anticipated return of 15%, the proportion invested in safety 1 is:
        • The correlation between belongings in a two-asset portfolio will increase throughout a market decline. If there is no such thing as a change within the proportion of every asset held within the portfolio or the anticipated commonplace deviation of the person belongings, the volatility of the portfolio is most definitely to:
          • Improve.
          • Lower.
          • Stay the identical.
        • Use the next knowledge to reply Questions 32 via 34.
        • An analyst has made the next return projections for every of three attainable outcomes with an equal chance of prevalence:
        • Which pair of belongings is completely negatively correlated?
          • Asset 1 and Asset 2. B. Asset 1 and Asset 3. C. Asset 2 and Asset 3.
        • If the analyst constructs two-asset portfolios which can be equally weighted, which pair of belongings has the bottom anticipated commonplace deviation?
          • Asset 1 and Asset 2. B. Asset 1 and Asset 3. C. Asset 2 and Asset 3.
        • If the analyst constructs two-asset portfolios which can be equally weighted, which pair of belongings supplies the least quantity of danger discount?
          • Asset 1 and Asset 2. B. Asset 1 and Asset 3. C. Asset 2 and Asset 3.
        • Which of the next statements is least correct? The environment friendly frontier is the set of all attainable dangerous belongings with the:
          • Highest anticipated return for a given stage of danger.
          • Lowest quantity of danger for a given stage of return.
          • Highest anticipated return relative to the risk-free price.
        • The portfolio on the minimum-variance frontier with the bottom commonplace deviation is:
          • Unattainable.
          • The optimum dangerous portfolio.
          • The worldwide minimum-variance portfolio.
        • The set of portfolios on the minimum-variance frontier that dominates all units of portfolios under the worldwide minimum-variance portfolio is the:
          • Capital allocation line.
          • Markowitz environment friendly frontier.
          • Set of optimum dangerous portfolios.
        • The dominant capital allocation line is the mix of the risk-free asset and the:
        • Optimum dangerous portfolio.
          1. Levered portfolio of dangerous belongings.
          1. International minimum-variance portfolio.
        • In comparison with the environment friendly frontier of dangerous belongings, the dominant capital allocation line has larger charges of return for ranges of danger larger than the optimum dangerous portfolio due to the investor’s potential to:
          1. Lend on the risk-free price.
          1. Borrow on the risk-free price.
          1. Buy the risk-free asset.
        • With respect to the mean-variance idea, the optimum portfolio is decided by every particular person investor’s:
          1. Danger-free price.
          1. Borrowing price.
          1. Danger desire.