Chapter 2: Q1CP (page 186)
A three-asset portfolio has the following characteristics:
Asset | Expected Return | Standard Deviation | Weight |
X | 15 | 22 | 0.50 |
Y | 10 | 8 | 0.40 |
Z | 6 | 3 | 0.10 |
What is the expected return on this three-asset portfolio?
12.1%
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What is the expected rate of return for a stock that has a beta of 1 if the expected return on the market is 15%?
a. 15%.
b. More than 15%.
c. Cannot be determined without the risk-free rate.
In forming a portfolio of two risky assets, what must be true of the correlation coefficient between their returns if there are to be gains from diversification? Explain.
At a cocktail party, your co-worker tells you that he has beaten the market for each of the last three years. Suppose you believe him. Does this shake your belief in efficient markets?
According to the efficient market hypothesis:
a. High-beta stocks are consistently overpriced.
b. Low-beta stocks are consistently overpriced.
c. Positive alphas on stocks will quickly disappear.
d. Negative-alpha stocks consistently yield low returns for arbitrageurs
Suppose you’ve estimated that the fifth-percentile value at risk of a portfolio is -30%. Now you wish to estimate the portfolio’s first-percentile VaR (the value below which lie 1% of the returns). Will the 1% VaR be greater or less than -30%?
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