Practice Quiz for Exam 2 - Risk & Return - Pt2A

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Arizona State University *

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302

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Finance

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Feb 20, 2024

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Submitted May 1, 2023 at 5:42pm Question 1 0 / 1 pts If you own a well-diversified portfolio, which of the following risks do you NOT need to be so concerned about? You Answered War and terrorism Unexpected changes in Federal Reserve policy Financial crises Correct Answer A sudden death of a firm's CEO A well diversified portfolio only has to worry about unsystematic risks. These risks are company/industry related risks. Systematic risks on the other hand have an effect on all stocks and cannot be diversified away. Question 2 0 / 1 pts The covariance between (the returns of) two stocks (Saguaro & Sandstorm) is 0.008 Saguaro's returns have a standard deviation of 23% Sandstorm's returns have a standard deviation of 15% What is the correlation coefficient between (the returns of) the two stocks? (Answer to the nearest 0.01) You Answered 5 Correct Answer 0.23 margin of error +/- 0.05 The formula for correlation is, CorrA,B = CovA,B/(SDA * SDB) *Make sure the SD is in decimals. Hence, SD/100 to make it a decimal. Question 3 0 / 1 pts A portfolio is formed with the following 2 stocks:

Desert, Inc. has a standard deviation of it's returns equal to 48% Mountain, Inc. has a standard deviation of it's returns equal to 10% 60% of the portfolio is invested in Desert and the remainder of the portfolio is invested in Mountain The correlation coefficient (between Desert's and Mountain's returns) is equal to 0.4 What is the standard deviation of the portfolio? (Answer to the nearest 0.01%) You Answered 55 Correct Answer 30.62 margin of error +/- 0.05 First, we find the weight of investment in Mountain portfolio, Mountain Weight = 100% - Desert Weight Next we find the variance of the portfolio, VarD,M = (WD^2 * SDD^2) + (WM^2 * SDM^2) + (2CorrD,M * WD * SDD * WM * SDM) Finally we square root the variance to find standard deviation, SDD,M = sqrt(VarD,M) *Make sure all calculations are in decimals while the final answer is in % Question 4 0 / 1 pts The covariance between (the returns of) two stocks (Saguaro & Sandstorm) is 0.006 Saguaro's returns have a standard deviation of 25% Sandstorm's returns have a standard deviation of 28% What is the correlation coefficient between (the returns of) the two stocks? (Answer to the nearest 0.01) You Answered 55 Correct Answer 0.09 margin of error +/- 0.05 The formula for correlation is, CorrA,B = CovA,B/(SDA * SDB)

*Make sure the SD is in decimals. Hence, SD/100 to make it a decimal. Question 5 0 / 1 pts You own a portfolio containing the following 3 stocks - the dollar amounts invested in each stock, along with each stock’s return are indicated below. Stock Amount Invested Return A $500,000 -30% B $300,000 30% C $800,000 60% Calculate the portfolio return. (Answer to the nearest 0.01%) You Answered 5 Correct Answer 26.25 margin of error +/- 0.05 First find all the returns for each portfolio and sum them up, Total Return = (InvA * ReturnA) + (InvB * ReturnB) + (InvC * ReturnC) Next, find the total amount invested, Total Invested = InvA + InvB + InvC Finally, calculate the portfolio return by dividing the total return with the total invested, Portfolio Return = Total Return/Total Invested *Make sure the final answer is in percentage by multiplying 100 Question 6 0 / 1 pts You own a portfolio containing the following 3 stocks - the fractions (of the portfolio) invested in each stock, along with each stock’s return are indicated below. Stock % of Portfolio Return

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FinTech 20% -30% BioTech 20% 20% OldEcon Remainder of Portfolio 40% Calculate the portfolio return. (Answer to the nearest 0.01%) You Answered 5 Correct Answer 22 margin of error +/- 0.05 First, find the % of OldEcon in the portfolio, OldEcon = 100% - FinTech - BioTech The portfolio return is the sum of all the weight of the portfolios multiplied by their return, Portfolio Return = (FinTech% * RFintech) + (BioTech% * RBiotech) + (OldEcon% * ROldEcon)