0/ 0.5 points Question9 You put 65% of your money in a stock portfolio that has
ID: 1172070 • Letter: 0
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0/ 0.5 points Question9 You put 65% of your money in a stock portfolio that has an expected return of 12% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6.5% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .3. What is the standard deviation of the resulting portfolio? a) 17.3% b) 20.5% c) 19.4% d) 18.6% e) 16.5% 0/0.5 points Question 13 Unsystematic risk is also referred to as a) unique risk or market risk b) firm-specific risk or diversifiable risk c) market risk or nondiversifiable risk d) diversifiable risk or market risk e) systematic risk or unique riskExplanation / Answer
Soln. 9)
Given:
weight of stock portfolio = w1 = 0.65
weight of bond portfolio = w2 = 1 - 0.65 = 0.35
Standard Deviation of stock portfolio = sigma1 = 0.24
Standard Deviation of bond portfolio = sigma2 = 0.12
Correlation(Stock,Bond) = rho(1,2) = 0.3
Substituting above values in formula for standard deviation of the portfolio:
sigmaportfolio = squareroot(w12 sigma12 + w22 sigma22 + 2 * w1 * w2 * rho(1,2) * sigma1 * sigma2 )
= squareroot(0.652 0.242 + 0.352 0.122 + 2 * 0.65 * 0.35 * 0.3 * 0.24 * 0.12)
= 0.1733 = 17.3% (rounded) {Answer choice a}
Soln. 10) Correct Choice: (b) firm-specific risk/diversifiable (Unsystematic risk depends on firm specific factors and can be reduced through diversification)
(a) Option is incorrect because market risk refers to systematic risk. Market risk arises due to uncertainity associated with entire market.
(c) Option is incorrect because market risk refers to systematic risk. Market risk arises due to uncertainity associated with entire market. Also unsystematic risk is diversifiable.
(d) Option is incorrect because market risk refers to systematic risk. Market risk arises due to uncertainity associated with entire market.
(e) Option is incorrect because systematic risk arises due to uncertainity associated with entire market.
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