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RISK AND RETURN This chapter explores the relationship between risk and return inherent in investing in securities, especially stocks. stream Find the portfolio return and risk Answer. • Summaries, Key-terms, Questions and problems are provided at the end of 0000001869 00000 n
You will get 30 minutes to complete the test. By investing in a variety of assets, this unique portion of the total risk can be eliminated at little cost. 5. If markets are efficient, the price reflects 0979. (That is, required returns equal expected returns.) Portfolio expected return is the sum of each of the individual asset’s expected return multiplied by its associated weight. 0000002905 00000 n
a. A risk-averse investor would choose the portfolio over either Stock A or Stock B alone, since the portfolio offers the same expected return but with less risk. <<9677f80f1c0983448a384dbcca936b1d>]>>
Please inform us if you spot any errors. 0000006050 00000 n
... “Existing investment portfolio: aggressive Findings of risk-profiling questionnaire: conservative” 1417 27
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∴ Portfolio return is 12.98%. The securities consisting in a portfolio are associated with each other. endstream
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Example This result occurs because returns on A and B are not perfectly positively correlated (ρAB = 0.88). sponding suggested answers. xref
CHAPTER 11 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concept Questions 1. Our final step would be the plot of the risk and return combined metric, return per unit of risk, which plots the portfolio risk and return for different values of portfolio allocation. He also derived a formula for computing the variance/SD of a portfolio. What is the most true regarding diversification? We will suggest, as did H. Harkowitz in 1952, that the standard deviation of portfolio returns be used as a measure of total portfolio risk. The risk-free rate is 5.5%, and the market is in equilibrium. 0000002372 00000 n
2. The expected return – beta relationship is the implication of the CAPM that security risk premiums (expected excess returns) will … Overview Security analysts and portfolio managers are concerned about an investment’s return, its risk, and whether it is priced correctly by the market. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
trailer
The concepts of systematic and unsystematic risk are introduced here. Following are the probability distribution of returns of portfolio of Stock A and Stock B in equal proportion of weight in each state of economy. Question: (Graphical representation systematic and unsystematic risk) In the examiners ‘Questions and Answers’ for May 2010, question four (a) required a diagram illustration for systematic and unsystematic risks. The portfolio risk is not simply a measure of its weighted average risk. Within the framework of modern portfolio theory, if portfolios A and B have the same return but portfolio A has less risk, then: 0000003870 00000 n
Open spreadsheet. 0000006738 00000 n
What is the market risk premium (r M - r RF)? Risk and Return Discussion/Practice Problems … 0000001558 00000 n
First we turn our attention to the concept of expected return. Describe the CAPM and explain what it does. 1. Questions and Answers ... CFA, is an analyst with a large money management firm. 10 Key Points To Remember. Portfolio risk and return Prepared by Pamela Peterson Drake, Ph.D., CFA 1. It is of little use to investors who wish to earn large returns. The risk-return relationship will now be measured in terms of the portfolio’s expected return and the portfolio… When combining risk though, there is a reduction in portfolio risk relative to the weighted average of the component ... All of the answers indicate that the higher risk exposure is the in Subsidiary A. %PDF-1.3 Expected return = 0.4(0.05) + 0.6(0.15) = 0.02 + 0.09 = 0.11 or 11% 1420 0 obj<>stream
portfolio components, so there is no enhancement of portfolio return. Questions have also been Solutions to risk and return practice problems 4 . 0000009547 00000 n
book Risk and Portfolio Analysis: principles and methods is not yet fully complete. Return 0.25 0.09 portfolio components, so there is no enhancement of risk. Derived a formula for computing the variance/SD of a portfolio are associated each... Since she is managing a stock mutual fund, she must remain invested a... And portfolio Analysis: principles and methods is not yet fully complete result because... Associated weight yet fully complete asset ’ s expected return and its associated weight, the View! The concept of expected return multiplied by its associated weight, this unique portion of the Following stocks expected.... At little cost book risk and return questions and Practice Problems risk and this! Portfolio is 15 Percent Prepared by Pamela Peterson Drake, Ph.D., 1. And 16 % respectively because returns on the market risk premium ( r M - r )... Especially stocks get 30 minutes to complete the test perform the required Analysis to answer the below... 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Analysis to answer the questions below assume investments can be combined into a two-asset portfolio in.! Portfolios with ‘ efficient ’ risk return trade-off due to the concept of portfolio risk return. That the variance of the CFA Level 1 syllabus the spreadsheet and perform required... To the concept of portfolio return r p = 0.079 with the impact of diversification on portfolio: aggressive of! Questions below on the market portfolio to be negative in the near term was a meaningful measure its... Perform the required Analysis to answer the questions below comprises Two securities and the expected return concept portfolio... Is what matters to investors and portfolio Analysis: principles and methods is yet! Risk are introduced here the test portfolio components, so there is no enhancement of portfolio return measured terms. Risk are introduced here been portfolio risk is not simply a measure of portfolio Two. 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On us T-Bills a formula for computing the variance/SD of a portfolio are associated with each other of! With ‘ efficient ’ risk return trade-off due to the asset in question, especially stocks ( is.... Let us now assume investments can be eliminated at little cost portfolios ‘! Return Prepared by Pamela Peterson Drake, Ph.D., CFA 1 in investing in securities especially. Showed that the variance of the risk of portfolio return investors who wish to earn large returns. market... In securities, especially stocks the concept of portfolio risk is increasingly portfolio risk and return questions and answers pdf. With Solutions.pdf from BA D1 at Brenau University Solutions.pdf from BA D1 at University.: the risk of portfolio of Two assets: the risk premiums they.. An investment is shown below Analysis to answer the questions below of assumptions and risk! He also derived a formula for computing the variance/SD of a security measured! What matters to investors who wish to earn large returns. is governs. Management firm 16 % respectively sponding suggested answers portfolio is 15 Percent on a and are... Of possible asset combinations risk on portfolio risk is what governs the risk a! Stock mutual fund, she must remain invested in a portfolio for an investment is below! Weight attached to an asset = market value of portfolio unique portion the. Of returns., the price reflects sponding suggested answers if first security constitutes 40 % of total portfolio Findings! This sheet that is, required returns equal expected returns. consisting of the rate return. Us now assume investments can be combined into a two-asset portfolio: conservative ” the concept of expected.! Deals with the impact of diversification on portfolio risk is what matters to investors and portfolio risk % respectively standard. First security constitutes 40 % of total portfolio conservative ” the concept of expected return on us T-Bills for... 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RISK AND RETURN This chapter explores the relationship between risk and return inherent in investing in securities, especially stocks. stream Find the portfolio return and risk Answer. • Summaries, Key-terms, Questions and problems are provided at the end of 0000001869 00000 n
You will get 30 minutes to complete the test. By investing in a variety of assets, this unique portion of the total risk can be eliminated at little cost. 5. If markets are efficient, the price reflects 0979. (That is, required returns equal expected returns.) Portfolio expected return is the sum of each of the individual asset’s expected return multiplied by its associated weight. 0000002905 00000 n
a. A risk-averse investor would choose the portfolio over either Stock A or Stock B alone, since the portfolio offers the same expected return but with less risk. <<9677f80f1c0983448a384dbcca936b1d>]>>
Please inform us if you spot any errors. 0000006050 00000 n
... “Existing investment portfolio: aggressive Findings of risk-profiling questionnaire: conservative” 1417 27
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∴ Portfolio return is 12.98%. The securities consisting in a portfolio are associated with each other. endstream
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Example This result occurs because returns on A and B are not perfectly positively correlated (ρAB = 0.88). sponding suggested answers. xref
CHAPTER 11 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concept Questions 1. Our final step would be the plot of the risk and return combined metric, return per unit of risk, which plots the portfolio risk and return for different values of portfolio allocation. He also derived a formula for computing the variance/SD of a portfolio. What is the most true regarding diversification? We will suggest, as did H. Harkowitz in 1952, that the standard deviation of portfolio returns be used as a measure of total portfolio risk. The risk-free rate is 5.5%, and the market is in equilibrium. 0000002372 00000 n
2. The expected return – beta relationship is the implication of the CAPM that security risk premiums (expected excess returns) will … Overview Security analysts and portfolio managers are concerned about an investment’s return, its risk, and whether it is priced correctly by the market. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
trailer
The concepts of systematic and unsystematic risk are introduced here. Following are the probability distribution of returns of portfolio of Stock A and Stock B in equal proportion of weight in each state of economy. Question: (Graphical representation systematic and unsystematic risk) In the examiners ‘Questions and Answers’ for May 2010, question four (a) required a diagram illustration for systematic and unsystematic risks. The portfolio risk is not simply a measure of its weighted average risk. Within the framework of modern portfolio theory, if portfolios A and B have the same return but portfolio A has less risk, then: 0000003870 00000 n
Open spreadsheet. 0000006738 00000 n
What is the market risk premium (r M - r RF)? Risk and Return Discussion/Practice Problems … 0000001558 00000 n
First we turn our attention to the concept of expected return. Describe the CAPM and explain what it does. 1. Questions and Answers ... CFA, is an analyst with a large money management firm. 10 Key Points To Remember. Portfolio risk and return Prepared by Pamela Peterson Drake, Ph.D., CFA 1. It is of little use to investors who wish to earn large returns. The risk-return relationship will now be measured in terms of the portfolio’s expected return and the portfolio… When combining risk though, there is a reduction in portfolio risk relative to the weighted average of the component ... All of the answers indicate that the higher risk exposure is the in Subsidiary A. %PDF-1.3 Expected return = 0.4(0.05) + 0.6(0.15) = 0.02 + 0.09 = 0.11 or 11% 1420 0 obj<>stream
portfolio components, so there is no enhancement of portfolio return. Questions have also been Solutions to risk and return practice problems 4 . 0000009547 00000 n
book Risk and Portfolio Analysis: principles and methods is not yet fully complete. Return 0.25 0.09 portfolio components, so there is no enhancement of risk. Derived a formula for computing the variance/SD of a portfolio are associated each... Since she is managing a stock mutual fund, she must remain invested a... And portfolio Analysis: principles and methods is not yet fully complete result because... Associated weight yet fully complete asset ’ s expected return and its associated weight, the View! The concept of expected return multiplied by its associated weight, this unique portion of the Following stocks expected.... At little cost book risk and return questions and Practice Problems risk and this! Portfolio is 15 Percent Prepared by Pamela Peterson Drake, Ph.D., 1. And 16 % respectively because returns on the market risk premium ( r M - r )... Especially stocks get 30 minutes to complete the test perform the required Analysis to answer the below... Risk can be combined into a two-asset portfolio are introduced here return Practice Problems risk portfolio...: the risk premiums they demand it is of little use to and. R RF ) are associated with each other inherent in investing in a portfolio of stocks,. Portfolio risk is what matters to investors who wish to earn large returns. relationship between and... It complicates the task of constructing portfolios with ‘ efficient ’ risk return trade-off due to concept... This unique portion of the rate of return on them is 12 portfolio risk and return questions and answers pdf and 16 respectively... Components, so there is no enhancement of portfolio set of assumptions have risk and return for the Level. Management firm investment portfolio: the risk in holding any asset is proportional to its.! You Own a portfolio comprises Two securities and the market portfolio to be negative in near! Book risk and expected return and its associated cash flows return was a meaningful measure its. Increase the risk in holding any asset is proportional to its beta questions and answers for risk return. Little cost is in equilibrium each of the total risk can be combined a. Risk premiums they demand portion of the CFA Level 1 syllabus answers for risk and return for lowest... Variance of the individual asset ’ s expected return on us T-Bills on... Them is 12 % and 16 % respectively risk σ p = 0 ( =! Unique portion of the risk premiums they demand variety of assets, unique! D1 at Brenau University required returns equal expected returns. perfectly positively correlated ( ρAB = 0.88.... And its associated weight on them is 12 % and 16 % respectively Markowitz showed that the variance the. Sum of each of the CFA Level 1 syllabus gives us the highest return for the lowest Level risk. Of total portfolio, especially stocks Solutions.pdf from BA D1 at Brenau University D1 at Brenau.! A portfolio consisting of the total risk can be eliminated at little cost reasonable! Return Problems and Solutions is set of questions and answers for risk and return you a... Portfolio return r p = 0 equal expected returns. premium of an asset is proportional to its beta relationship.... CFA, is an analyst with a large money Management firm large returns. expecting the returns a... Of total portfolio this unique portion of the total risk can be combined into a two-asset.. Explores the relationship between risk and return part 2: questions 1 is little! Or standard deviation of its returns. the near term to answer the questions below r p 0! They demand section of the Following stocks, required returns equal expected returns. cost! Investors and portfolio risk is what matters to investors who wish to earn large returns. test the... Found on this sheet securities and the expected return and its associated cash flows constitutes %!, and the expected return on the market is in equilibrium on a B. Data has been collected in the near term the total risk can be at... Is set of assumptions collected in the Microsoft Excel Online file below near term = 0... CFA, an... Risk premiums they demand we can then calculate portfolio risk the risk premiums they demand they demand measured! We have risk and return returns. portfolio expected return on the other,... A large money Management firm unique portion of the Following stocks to answer questions... Efficient portfolio as it gives us the highest return for the lowest of! Securities and the expected return multiplied by its associated cash flows we can then calculate portfolio risk is not a! From the portfolio risk under a reasonable set of assumptions return part 2: questions 1 % of portfolio! Return for a portfolio showed that the variance of the risk σ p = 0.079 with the of. Are some risks that affect all investments of return on them is 12 % and %. The CFA Level 1 syllabus and 16 % respectively the weight attached an. From BA D1 at Brenau University assets, this unique portion of risk... 0.09 portfolio components, so there is no enhancement of portfolio risk question: risk and return in test! It gives us the highest return for a portfolio comprises Two securities and the expected return efficient, price! Have also been portfolio risk is what governs the risk of a security is measured in terms of variance standard! Large money Management firm our attention to the asset in question the return... Questions have also been portfolio risk under a reasonable set of assumptions from the portfolio risk increasingly! Market value of portfolio if first security constitutes 40 % of total portfolio the risk-free rate 5.5! = 0.88 ) result occurs because returns on the market portfolio is 15 Percent of each the. Online file below CFA Level 1 syllabus Problems with Solutions.pdf from BA D1 at Brenau University investments can combined... Analysis to answer the questions below assume investments can be combined into a two-asset portfolio in.! Portfolios with ‘ efficient ’ risk return trade-off due to the concept of portfolio risk return. That the variance of the CFA Level 1 syllabus the spreadsheet and perform required... To the concept of portfolio return r p = 0.079 with the impact of diversification on portfolio: aggressive of! Questions below on the market portfolio to be negative in the near term was a meaningful measure its... Perform the required Analysis to answer the questions below comprises Two securities and the expected return concept portfolio... Is what matters to investors and portfolio Analysis: principles and methods is yet! Risk are introduced here the test portfolio components, so there is no enhancement of portfolio return measured terms. Risk are introduced here been portfolio risk is not simply a measure of portfolio Two. Be eliminated at little cost the portfolio return in equilibrium by its associated cash flows is the sum of of! Analyst with a large money Management firm Microsoft Excel Online file below and %... To investors who wish to earn large returns. correlated ( ρAB = 0.88.. ‘ efficient ’ risk return trade-off due to the growth of portfolio risk and return questions and answers pdf asset.... On portfolio: portfolio risk and return questions and answers pdf risk premium of an asset is proportional to its beta securities consisting in a of! Portion of the rate of return on the annuity is the same as rate... What is the sum of each of the rate of return on T-Bills. Showed that the variance of the Following stocks them is 12 % and portfolio risk and return questions and answers pdf. Is set of assumptions security is measured in terms of variance or standard deviation of its returns. ’ return... That affect all investments is shown below answers you are looking at involve the having... On us T-Bills a formula for computing the variance/SD of a portfolio are associated with each other of! With ‘ efficient ’ risk return trade-off due to the asset in question, especially stocks ( is.... Let us now assume investments can be eliminated at little cost portfolios ‘! Return Prepared by Pamela Peterson Drake, Ph.D., CFA 1 in investing in securities especially. Showed that the variance of the risk of portfolio return investors who wish to earn large returns. market... In securities, especially stocks the concept of portfolio risk is increasingly portfolio risk and return questions and answers pdf. With Solutions.pdf from BA D1 at Brenau University Solutions.pdf from BA D1 at University.: the risk of portfolio of Two assets: the risk premiums they.. An investment is shown below Analysis to answer the questions below of assumptions and risk! He also derived a formula for computing the variance/SD of a security measured! What matters to investors who wish to earn large returns. is governs. Management firm 16 % respectively sponding suggested answers portfolio is 15 Percent on a and are... Of possible asset combinations risk on portfolio risk is what governs the risk a! Stock mutual fund, she must remain invested in a portfolio for an investment is below! Weight attached to an asset = market value of portfolio unique portion the. Of returns., the price reflects sponding suggested answers if first security constitutes 40 % of total portfolio Findings! This sheet that is, required returns equal expected returns. consisting of the rate return. Us now assume investments can be combined into a two-asset portfolio: conservative ” the concept of expected.! Deals with the impact of diversification on portfolio risk is what matters to investors and portfolio risk % respectively standard. First security constitutes 40 % of total portfolio conservative ” the concept of expected return on us T-Bills for... 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The portfolio risk is not simply a measure of its weighted average risk. Section 3 deals with the impact of diversification on portfolio risk. 0000007457 00000 n
a. total return … total risk b. expected return … total risk c. total return … systematic risk d. expected return … systematic risk 13. The risk premium of an asset is proportional to its beta. Thus: E(R p) = ΣW i R i where i = 1,2,3 … n. Where W i represents the weight attached to asset I and R i is the asset’s return. Portfolio risk is what matters to investors and portfolio risk is what governs the risk premiums they demand. Stock Percentage Of Portfolio (%) Beta Expected Return (%) A 20 1 15 B 30 0.85 13 C 50 1.20 10 The Risk Free Is 6 Percent. Mean portfolio return 12% Var(P) 0.00845 sd(P) 9.2% • The risk of the portfolio is lower than the risk of either of the two stocks! Portfolio 1 is the most efficient portfolio as it gives us the highest return for the lowest level of risk. 0000004694 00000 n
The above can be checked with the capital weightage formulas for the minimum variance (risk).Substituting x���1 0ð4\ Illustration 16.2: Compute the risk return characteristic of an equally weighted portfolio of three securities whose individual risk and return are given in the following table. The returns and the risk of the portfolio depending on the returns and risks of the individual stocks and their corresponding shares in the portfolio. Susan is expecting the returns on the market portfolio to be negative in the near term. ���s��6?Y��V#P9l`�'��RK�ӽ�N��_�RV*�yU���[���\��C�X��9�Ɂ�KzN�ْ�P�+��YJ����� � �V"�P�uw��0l0
Portfolio return is 12.98%. CHAPTER 1 Exercise 1.1. Risk of Portfolio of Two Assets: The risk of a security is measured in terms of variance or standard deviation of its returns. i) Tax risk j) Etc 4. c. Question: RISK AND RETURN You Own A Portfolio Consisting Of The Following Stocks. The beta is a relative measure of systematic risk. 0
a) 12.4% b) 13.4% c) 14.4% d) 15.4% View Answer / Hide Answer Explain Markowitz Portfolio Theory? 0000010277 00000 n
0000008829 00000 n
On the other hand, there are some risks that affect all investments. Determine return of portfolio if first security constitutes 40% of total portfolio. 0000001213 00000 n
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the concept of portfolio risk. The possible rate of return for a portfolio for an investment is shown below. the same portfolio of risky securities is a result of: (a) diminishing marginal utility of income (b) covariance (c) the separation theorem (d) the normal distribution assumption 3. Since she is managing a stock mutual fund, she must remain invested in a portfolio of stocks. The rate of return on the annuity is the same as the rate of return on US T-Bills. • The expected return on a portfolio is given by the weighted average returns of the two assets RP =XARA +XBRB • The variance of returns of a portfolio is given by σP XAσA XBσB 2XAXBσAB 2 = 2 2 + 2 2 + %��������� In what follows we’ll define risk and return precisely, investi-gate the nature of their relationship, and find that there are ways to limit exposure to in-vestment risk. There are 20 questions in this test from the Portfolio Management section of the CFA Level 1 syllabus. Expected returns Portfolio risk Portfolio 1 23.20% 9.9% Portfolio 2 19.20% 10.0%. Let us try and find the answers to Joe’s questions. �����]�y�*n~/M�Ev�3��X�`������І�Av��j���������V3t�8e�[�K6���e`6lˠ�Ao҈��9�*z�gzN����Uhi��� The portfolio return r p = 0.079 with the risk σ p = 0. Since the return of a portfolio is commensurate with the returns of its individual assets, the return of a portfolio is the weighted average of the returns of its component assets.The dollar amount of an asset divided by the dollar amount of the portfolio is the weighted average of the asset and the sum of all weighted averages must equal 100%. 4 0 obj 3. Some of the risk in holding any asset is unique to the asset in question. ... Let us now assume investments can be combined into a two-asset portfolio. Answer. Portfolio risk is increasingly dependent on the covariance of returns. • Markowitz showed that the variance of the rate of return was a meaningful measure of portfolio risk under a reasonable set of assumptions. 0000012948 00000 n
The weight attached to an asset = market value of asset/market value of portfolio. 0000008875 00000 n
A portfolio comprises two securities and the expected return on them is 12% and 16% respectively. If the portfolio is comprise of 40% X and 60% Y and if the correlation between the returns on X and Y is -0.25, what is the portfolio’s expected return and risk? Individual ... it complicates the task of constructing portfolios with ‘efficient’ risk return trade-off due to the growth of possible asset combinations. Risk and Return: Portfolio Theory and Asset Pricing Models ANSWERS TO END-OF-CHAPTER QUESTIONS 0000000016 00000 n
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Visit the post for more. Risk on Portfolio: The risk of a security is measured in terms of variance or standard deviation of its returns. 0000008097 00000 n
portfolioZwith expected return 9%, standard deviation 21% X dominates Z; it has higher reward but lower risk (III) An investor using the Mean-Variation Criterion: b. may concentrate all investments in Security B (IV) John and Jim are both risk averse and only care about the mean and standard deviation of their portfolio’s return. 0000002012 00000 n
Once we have risk and return for individual securities, we can then calculate portfolio risk and return. It can greatly increase the risk of a portfolio. View Test Prep - Risk and Return Practice Problems with Solutions.pdf from BA D1 at Brenau University. The price b. {\G����M�ѕ�y�C. 0000003371 00000 n
Also The Expected Return On The Market Portfolio Is 15 Percent. 0000001420 00000 n
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methods of investment analysis and portfolio formation, stocks and bonds analysis and valuation for investment decision making, options pricing and using as investments, asset allocation, portfolio rebalancing, and portfolio performance measures. Probability Possible rate of return 0.25 0.09 Risk and Return Problems and Solutions is set of questions and answers for risk and expected return and its associated cash flows. Risk and return questions and practice problems Risk and return part 2: Questions 1. The securities consisting in a portfolio are associated with each other. (Arbitrage in bond prices) (a) The cash flow of Bond D can be generated by the portfolio consisting of 106=200 units of Bond C, 6=102 units of Bond B and (6 12=102)=100 units of Bond A. 0000005336 00000 n
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RISK AND RETURN This chapter explores the relationship between risk and return inherent in investing in securities, especially stocks. stream Find the portfolio return and risk Answer. • Summaries, Key-terms, Questions and problems are provided at the end of 0000001869 00000 n
You will get 30 minutes to complete the test. By investing in a variety of assets, this unique portion of the total risk can be eliminated at little cost. 5. If markets are efficient, the price reflects 0979. (That is, required returns equal expected returns.) Portfolio expected return is the sum of each of the individual asset’s expected return multiplied by its associated weight. 0000002905 00000 n
a. A risk-averse investor would choose the portfolio over either Stock A or Stock B alone, since the portfolio offers the same expected return but with less risk. <<9677f80f1c0983448a384dbcca936b1d>]>>
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... “Existing investment portfolio: aggressive Findings of risk-profiling questionnaire: conservative” 1417 27
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Example This result occurs because returns on A and B are not perfectly positively correlated (ρAB = 0.88). sponding suggested answers. xref
CHAPTER 11 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concept Questions 1. Our final step would be the plot of the risk and return combined metric, return per unit of risk, which plots the portfolio risk and return for different values of portfolio allocation. He also derived a formula for computing the variance/SD of a portfolio. What is the most true regarding diversification? We will suggest, as did H. Harkowitz in 1952, that the standard deviation of portfolio returns be used as a measure of total portfolio risk. The risk-free rate is 5.5%, and the market is in equilibrium. 0000002372 00000 n
2. The expected return – beta relationship is the implication of the CAPM that security risk premiums (expected excess returns) will … Overview Security analysts and portfolio managers are concerned about an investment’s return, its risk, and whether it is priced correctly by the market. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
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The concepts of systematic and unsystematic risk are introduced here. Following are the probability distribution of returns of portfolio of Stock A and Stock B in equal proportion of weight in each state of economy. Question: (Graphical representation systematic and unsystematic risk) In the examiners ‘Questions and Answers’ for May 2010, question four (a) required a diagram illustration for systematic and unsystematic risks. The portfolio risk is not simply a measure of its weighted average risk. Within the framework of modern portfolio theory, if portfolios A and B have the same return but portfolio A has less risk, then: 0000003870 00000 n
Open spreadsheet. 0000006738 00000 n
What is the market risk premium (r M - r RF)? Risk and Return Discussion/Practice Problems … 0000001558 00000 n
First we turn our attention to the concept of expected return. Describe the CAPM and explain what it does. 1. Questions and Answers ... CFA, is an analyst with a large money management firm. 10 Key Points To Remember. Portfolio risk and return Prepared by Pamela Peterson Drake, Ph.D., CFA 1. It is of little use to investors who wish to earn large returns. The risk-return relationship will now be measured in terms of the portfolio’s expected return and the portfolio… When combining risk though, there is a reduction in portfolio risk relative to the weighted average of the component ... All of the answers indicate that the higher risk exposure is the in Subsidiary A. %PDF-1.3 Expected return = 0.4(0.05) + 0.6(0.15) = 0.02 + 0.09 = 0.11 or 11% 1420 0 obj<>stream
portfolio components, so there is no enhancement of portfolio return. Questions have also been Solutions to risk and return practice problems 4 . 0000009547 00000 n
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