Question 5 Your portfolio consists of two stocks. You have $2000 in stock A and

Question

Question 5

Your portfolio consists of two stocks. You have $2000 in stock A and $8000 in stock B. The returns for stock A have a standard deviation of 20% and the returns for stock B have a standard deviation of 10%. The correlation coefficient between A and B is 0. What is your portfolio standard deviation?

Select one:

a. 11.2%

b. 9.4%

c. 10.5%

d. 10.2%

e. 8.9%

Question 12

An investment earned the following returns for the years 2013 through 2016:20%, -5%, 35%, and 10%. What is the variance of returns for this investment?

Select one:

a. 0.2987

b. 0.0283

c. 0.1747

d. 0.0892

e. 0.0292

Question 13

If a stock portfolio is well diversified, then the portfolio variance:

Select one:

a. may be less than the variance of the least risky stock in the portfolio.

b. will be a weighted average of the variances of the individual securities in the portfolio.

c. will equal the variance of the most volatile stock in the portfolio.

d. must be equal to or greater than the variance of the least risky stock in the portfolio.

e. will be an arithmetic average of the variance of the individual securities in the portfolio.

Question 14

Net income divided by the total assets is referred to as the profit margin.

Select one:

True

False

Question 15

The cost of capital associated with an investment does not depend on the risk of that investment.

Select one:

True

False

Explanation / Answer

Answering the first question as per Chegg policy

Question 5

Your portfolio consists of two stocks. You have $2000 in stock A and $8000 in stock B. The returns for stock A have a standard deviation of 20% and the returns for stock B have a standard deviation of 10%. The correlation coefficient between A and B is 0. What is your portfolio standard deviation?

Select one:

a. 11.2%

b. 9.4%

c. 10.5%

d. 10.2%

e. 8.9%

Answer: Option -

Explanation:

Weight of share assigned to stock A = Wa = 2000/(2000+8000) = 0.20

Weight of share assigned to stock B = Wb = 8000/(2000+8000) = 0.80

Standard deviation of stock A = 20% = SDa = 0.20

Standard deviation of stock B = 10% = SDb = 0.10

Covariance = Cov = 0

Variance of the portfolio = (Wa2 x SDa2) + (Wb2 x SDb2) + (2 x Wa x Wb x Cov)

= (0.202 x 0.202) + (0.802 x 0.102) + (2 x 0.20 x 0.80 x 0)

= 0.008

Standard Deviation = Square root of variance = Sqrt(0.008) = 0.089 = 8.9%

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