A portfolio is made up of two assets. 30% of the portfolio value is invested in

Question

A portfolio is made up of two assets. 30% of the portfolio value is invested in the first asset that has a beta of 0.8 while the second asset has a beta of 1.3. The portfolio beta is:

a) 0.8 b) 0.95 c) 1.15 d) 1.54 e) it is not possible to know The standard deviation and beta differ as risk measures in that the standard deviation measures: a) only unsystematic risk, while beta measures total risk b) only systematic risk, while beta measures total risk c) only unsystematic risk, while beta measures systematic risk d) both systematic and unsystematic risk, while beta measures only unsystematic risk e) both systematic and unsystematic risk, while beta measures only systematic risk f) none of the above The IRR decision rule a) is always equivalent to the NPV decision rule b) is very similar to the payback period decision rule c) is equivalent most of the times to the NPV decision rule, but may disagree with it in some situations d) almost never agrees with the NPV decision rule e) none of the above

Explanation / Answer

Question - 1

The Portfolio Beta = [ Beta of first asset x Weight of first asset ] + [ Beta of second asset x Weight of second asset ]

= [ 0.80 x 0.30 ] + [ 1.30 x 0.70 ]

= 0.24 + 0.91

= 1.15

Hence, The answer is “C. 1.15 “

Question – 2

The Answer is “(e) both systematic and unsystematic risk, while beta measures only systematic risk

The standard deviation and beta differ as risk measures in that the standard deviation measures both systematic and unsystematic risk, while beta measures only systematic risk

Question – 3

The Answer is “(a) is always equivalent to the NPV decision rule.

Internal Rate of Return (IRR) is the rate at which the Net Present Value of the project (NPV) is Zero.If the IRR of the Project is greater than the cost of capital of the project, then the Investment should be accepted and if it is less than the cost of capital, it should be rejected

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