Topic F Exercises

Exercises: a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance between the returns of A and B is 0.006. The correlation of returns between A and B is: b. Explain the differences between systemic risk and unsystematic risk, give additional examples c. Compare and contrast the Capital Market Line and Security Market Line d. The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.08, and the standard deviation of the stock's returns is 0. 11. What is the correlation coefficient of the returns of the stock and the returns of the market? e. According to the CAPM, what is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7% and the expected market rate of return is 14%

Portfolio risk is comprised of risk risk. Select one: O a. firm-specific; plus diversifiable b. systematic; minus unsystematic O c. diversifiable; plus unsystematic O d. market; plus non-diversifiable O e. market; plus firm-specific

Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items.  Question 2Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph

Fundamental analysis is a method of______________________________to determine intrinsic value of the stock.a. Measuring the intrinsic value of a security using the market indexb. Using qualitative and quantitative factorsc. Using statistical analysis such as standard deviation, coefficients and probabilitiesd. Using historical price movementse. B and C only

A. Briefly explain three risk exposures that an analyst should report as part of anenterprise risk management system.Page 4 of 10B. Define market risk and the economic parameters considered when calculatingmarket risk.C. Explain the concept of ‘beta’ within the framework of the Capital Asset PricingModel (CAPM). Discuss the relevance of the covariance between assets returnsfor an investor wishing to diversify the risk of a portfolio

risk premium (RP) expected return on a portfolio,r^P realized rate of return, r¨ diversification correlation coefficient, ρρ firm-specific (diversifiable) risk market (nondiversifiable) risk relevant risk beta coefficient, ββ capital asset pricing model (CAPM) security market line (SML) market risk premium (RPM) equilibrium Define all terms

A. Briefly explain three risk exposures that an analyst should report as part of anenterprise risk management systemB. Define market risk and the economic parameters considered when calculatingmarket risk.C. Explain the concept of ‘beta’ within the framework of the Capital Asset PricingModel (CAPM). Discuss the relevance of the covariance between assets returnsfor an investor wishing to diversify the risk of a portfolio

Compare and contrast the MPT with the CAPM with reference to the following aspects: Risk measurement; Risk-return graphical presentation – Capital Market Line (CML) versus Security Market Line (SML); Usage in portfolio management.

Question 1 Compare and contrast the Markowitz Portfolio Theory (MPT) with the Capital Asset Pricing Model (CAPM) with reference to the following aspects:Risk measurement;Risk-return graphical presentation Capital Market Line (CML) versus Security Market Line(SML);Usage in portfolio management.

Question No. 1:                                                                                        Explain the following Financial Terminology and then determined the relationship between its. portfolio efficient Beta Coefficient frontier efficient Diversification Diversifiable Risk Systematic Risk

Identify which refers to the relationship of interest and time of maturity of securities. Group of answer choices a. Term structure of interest rates b. Phillip's Curve c. Equilibrium interest and quantity d. Equilibrium price and quantity.

Standard deviation of portfolio returns is a measure of ___________.   Group of answer choices   total risk systematic risk market risk firm-specific risk unsystematic risk

vuunyiuunu assumption of "y. Q2. How portfolio return and risk is calculated? Explain the role of correlation among asset in portfolio? Why this correlation is important?

The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. a. Market Risk Premium b. Risk-free rate С. Stock's beta O d. Security Market Line e. Required Return on Stock

PLEASE ANSWER ALL THE QUESTIONS Question 1  Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items.  Question 2  Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML)  b) Superimpose the CAPM’s required return on the SML  c) Indicate which investments will plot on, above and below the SML?  d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph  Question 3  From the information generated in the previous two questions; a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-50 investment allocation in each investment alternative. b) Compute the expected return of the portfolio thus formed. c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?

The risk associated with the overall market is referred to as _____ risk. a. unsystematic b. diversified c. portfolio d. systematic

use attachments to answer question This question relates to Diagrams 6 - 9 from the 9.2 diagrams, each of which shows a set of portfolios plotted on a set of risk/return axes. Which diagram shows (in red) the set of efficient portfolios in the presence of a risk-free asset? Select one: a. Diagram 6 b. Diagram 7 c. Diagram 8 d. Diagram 9

With regard to interest rate sensitivity measures and bonds: Group of answer choices C. Convexity attempts to capture the sensitivity of a bond’s duration to changes in interest rates. D. Both B & C B. Duration is related to yield approximation and convexity is related to price. A. Convexity is related to yield approximation and duration is related to price

Which asset in the following table has the most market risk (also known as systematic or non- diversifiable risk)? Asset Return Beta Standard Deviation Asset A 11% 0.95 35% Asset B 13% 1.00 35% Asset C 9% 1.20 30% 1.) Asset C 2.) All three Assets 3.) Asset B 4.) Asset A and Asset B 5.) Asset A

Question 2 a) Plot the Security Market Line (SML).b) Superimpose the CAPM’s required return on the SML.c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph

The Capital Market Line (CML) expresses the risk-return trade-off for a portfolio as follows: E(Rport )=RFR+Oport [(E(Rm)-RFR)/om ] Required: Extend this expression to allow for the evaluation of any individual risky Asset i. Explain the steps in details.

1. Risk free rate represents: a. The market rate of return b. The rate provided by long term government securities c. Beta d. The rate provided by short term government securities   2. The market risk premium is measured by: a. T-bill rate. b. market return less risk-free rate. c. beta. d. standard deviation.   3. A stock with a beta of one would be expected to have a rate of return equal to a. the market risk premium b. the risk-free rate c. the market rate of return d. zero

The measure of risk for a security held in a diversified portfolio is:a. Specific risk.b. Standard deviation of returns.c. Reinvestment risk.d. Covariance.

Consider the following performance data for a portfolio manager:               Benchmark Portfolio Index Portfolio     Weight Weight Return Return   Stocks 0.65 0.7 0.11 0.12   Bonds 0.3 0.25 0.07 0.08   Cash 0.05 0.05 0.03 0.025   a.Calculate the percentage return that can be attributed to the asset allocation decision. b.Calculate the percentage return that can be attributed to the security selection decision.

CASE 3 (6 marks): The following graph shows the efficient frontier for the portfolio containing x, y and z securities EFFICIENT FRONTIER 0.00525 D 0.00475 В A 0.00425 W 0,00375 0.00325 0.00275 0.006 0.0065 0.007 0.0075 0.008 0.0085 op 3 а) Which combination of the portfolio is most efficient or the closest to optimal, A, B, C or D and why? Additionally, explain the difference between each of these portfolios. 3 b) If the star represents portfolio E, is it better than B? Explain why or why not. 3 c) If the triangle represents portfolio F, is it better than C? D? Explain why or why not. ERP

Define Arbitrage (risk-free) portfolio

Discuss the following operating hedge strategies 1. Risk Shifting 2. Price Adjustment clauses 3. Exposure netting