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Chapter 11 - Portfolio theory
Quiz
Show all questions
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Portfolio theory is based on the idea that:
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Combining investments increases returns
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Combining investments makes companies easier to run
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Combining investments reduces risk
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Shareholders like companies that have a wide range of interests
The following information relates to questions 2-7.
The shares of two companies, K and L have the following expected returns:
Prob
Return K
Return L
.3
20%
6%
.5
15%
10%
.2
5%
12%
The expected returns are:
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K 15% L 10%
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K 14.5% L 9.2%
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K 13.3% L 9.3%
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K 12% L 8%
The variance of returns are:
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K 14.5 L 9.2
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K 65.02 L 35.3
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K 27.25 L 4.96
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K 30.2 L 6.9
The standard deviations are:
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K 27.25 L 4.96
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K 14.5 L 9.2
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K 6.8 L 3.4
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K 5.22 L 2.23
The covariance of the returns of K and L is:
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-10.4
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0
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2.99
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5.97
If I have a portfolio made up of 60% K and 40% L my expected return will be:
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12.5%
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12.38%
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13.2%
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14.5%
If I have a portfolio made up of 60% K and 40% L my risk measured by standard deviation will be:
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2.37%
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4.02%
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5.68%
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7.45%
If I were to combine my K,L portfolio 50/50 with a risk free investment returning 6% my return would be:
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9%
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9.19%
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12%
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18.38%
If I were to combine my K,L portfolio 50/50 with a risk free investment returning 6% my risk measured by standard deviation would be:
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0
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1.19%
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2.78%
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4.02%
By investing in a portfolio of risky (i.e. the stock market) and risk free assets an investor can:
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Produce negative risk
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Avoid risk altogether
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Achieve the best possible returns
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Achieve the appropriate returns for the amount of risk they are prepared to take
OK
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