Investment Planning - Module 6

What is the coefficient of variation for an investment with a standard deviation of 8.65%, an expected return of 11.5%, and a beta of 1.25?

0.7522

Gary Stevens would like to know the weighted beta for his portfolio. He owns 100 shares of ACE common stock with a beta of 1.1 and total current market value of $5,000; 400 shares of BDF common stock with a beta of 0.70 and total current market value of $8,000; and 200 shares of GIK common stock with a beta of 1.5 and total current market value of $10,000. What is the overall weighted beta coefficient for Gary's portfolio?

1.13

Assuming JHG and DSA stocks have standard deviations of 6.23% and 10.78%, respectively, and a correlation coefficient of 0.17, calculate the covariance between the two stocks.

11.42

Your client, Jackson, is considering adding XYZ Mutual Fund to his portfolio. The fund has a correlation coefficient of 0.55 with the S&P 500, and he wants to know how much systematic risk the fund has when compared to this benchmark. You would advise him that the percentage of systematic risk is

30% You have been provided with the correlation coefficient (R) and what you need is the coefficient of determination (R2). Keystrokes are 0.55, DOWNSHIFT, "+" key = 0.3025. This means that 30% of the price movement of the fund is explained by the S&P 500, and the other 70% is not. Stated another way, there is 30% systematic risk, and 70% unsystematic risk.

The Gemini Fund has a correlation coefficient of 0.80 with the S&P 500 Index. How much of the price movement of the Gemini Fund can be explained by the S&P 500 Index?

64% The correlation coefficient (R) has been given, so it needs to be squared (R2) in order to come up with the coefficient of determination (0.802 = 0.64).

Portfolio A has a standard deviation of 55%, and the market has a standard deviation of 40%. The correlation coefficient between Portfolio A and the market is 0.50. Calculate the percentage of total risk that is unsystematic.

75%

The annual returns of the ABC fund have been +12%. -4%, and +7%. What is the standard deviation of the fund's returns?

8.19%

When analyzing various investment alternatives, investors would generally choose which of these?

An investment exhibiting a high positive skewness and a leptokurtic distribution

Identify which of these is NOT a source of systematic risk.

Business risk

Choose the statement regarding the correlation coefficient that is NOT correct.

Combining assets with less than perfect positive correlation will not reduce the total risk of the portfolio.

Which one of these factors has the greatest impact on the standard deviation of a two-asset portfolio?

Covariance

Which of these is NOT a type of unsystematic risk?

Exchange rate risk

Which of these types of risk is associated with the degree to which a company utilizes debt to finance its operations?

Financial Risk

Which of these statements concerning portfolio diversification is CORRECT? I. By increasing the number of securities in a portfolio, the total risk would be expected to fall at a decreasing rate. II. Total risk is reduced as diversification is increased. III. The benefits of diversification are not realized until at least 30 individual securities are included in the portfolio. IV. Diversification reduces the portfolio's expected return because diversification reduces a portfolio's total risk.

I and II

Wendy is concerned that her investment's actual return will not equal its expected return. Point out the type of risk that she is concerned about regarding her investment.

Investment risk

The Galaxy Fund has a standard deviation of 15, and a mean return of 9%. The Universe Fund has a standard deviation of 22, and a mean return of 13%. The Milky Way Fund has a standard deviation of 18, and a mean return of 11%. Which fund should you choose in order to minimize the risk per unit of return?

Milky Way Fund

In a positively skewed distribution, what is the order (from lowest value to highest) for the distribution's mode, mean, and median values?

Mode, median, mean

Select the term that measures how far the actual outcomes of a probability distribution deviate from the arithmetic mean

Skewness

Stock A has an expected mean return of 15% and a standard deviation of 22%; Stock B has an expected mean return of 11% and a standard deviation of 13%; and Stock C has an expected mean return of 18% and a standard deviation of 24%. You want to recommend one of these stocks to a client who is most interested in owning stocks that are more likely to deliver the expected mean return. Which stock should you recommend to meet this client's requirement?

Stock B

Beverly owns two stocks with a correlation coefficient of zero. Which of these is CORRECT?

These stocks will move independently of each other

Select the CORRECT statement regarding investors who only purchase high-beta stocks.

They prefer stocks with high risk and high positive skewness.

All of these statements concerning the use of the correlation coefficient in reducing portfolio risk are CORRECT except

combining two securities with perfect negative correlation provides no portfolio risk reduction.

The risk associated with the amount of debt a company has issued is

financial risk.

A distribution that is more peaked than normal is

leptokurtic.

Unsystematic (unique) risk can be reduced by buying

stocks in numerous unrelated companies.