EFET3714: Investment Alternatives - Rate of Return - Economics Assignment Help

Assignment Task:

1) Based on the outcomes in the following table, choose which of the statements below is (are) correct?

Scenario    Security A    Security B    Security C
Recession    Return >E(r)    Return = E(r)    Return <E(r)
Normal    Return = E(r)    Return = E(r)    Return = E(r)
Boom    Return <E(r)    Return = E(r)    Return > E(r)

I. The covariance of security A and security B is zero. 
II. The correlation coefficient between securities A and C is negative. 
III. The correlation coefficient between securities B and C is positive. 
A) I only
B) II only
C) II and III only
D) I, II, and III

2) Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is ________.
A) 1%
B) 3%
C) 6%
D) 9% 

3) Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as: 
A) 12.3%.
B) 10.4%.
C) 15.1%.
D) 16.7%.

4) The Arbitrage Pricing Theory (APT):
A. considers only one factor and is a narrower model than the CAPM.
B. considers more factors than the CAPM and is a broader model.
C. is useful only for well-diversified portfolios of common stock.
D. is easy to practice because the factors are readily observable.

5) You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately ________ in the risky portfolio. This will mean you will also invest approximately ________ and ________ of your complete portfolio in security X and Y, respectively.
A) 0%; 60%; 40%
B) 25%; 45%; 30%
C) 40%; 24%; 16%
D) 50%; 30%; 20% 

6) Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ________.
A) asset A
B) asset B
C) no risky asset
D) The answer cannot be determined from the data given.

7) Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________.
A) equal to the sum of the securities' standard deviations
B) equal to -1
C) equal to 0
D) greater than 0

8) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is ________.
A) 14%
B) 15.6%
C) 16.4%
D) 18%

9) An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately ________.
A) 29%
B) 44%
C) 56%
D) 71%

10) You run a regression for a stock's return on a market index and find the following Excel output:

Multiple R    0.35     
R-Square    0.12     
Adjusted R-Square    0.02     
Standard Error    38.45     
Observations    12     

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