1. A portfolio has an expected return of 10% and a standard deviation of 20%. As

Question

1. A portfolio has an expected return of 10% and a standard deviation of 20%. Assume normal distribution, what is Value at Risk (VaR) at 5% for this stock?

A. -40.21%

B. -32.25%

C. -22.90%

D. -28.32%

2. An investor buys $10,000 worth of a stock priced at $50 per share using 50% initial margin. The broker charges 10% on the margin loan and requires a 30% maintenance margin. In one year the investor gets a margin call. At the time of the margin call the stock's price must have been ____.

$33.15

$30.45

$40.00

$39.29

3. You have been following a stock for 5 years and the following is its past returns:

Year 1: -15%

Year 2: -10%

Year 3: 15%

Year 4: 5%

Year 5: 10%

What is the expected return of this investment using historical data?

10%

5%

15%

1%

4. If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the ________.

variance of the market

stock's beta

stock's standard deviation

covariance with the market index

5. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe measure of ____.

0.22

0.25

0.60

0.42

$33.15

$30.45

$40.00

$39.29

Explanation / Answer

1 Value at Risk (VaR) at 5% for this stock: -28.32% 2 A margin call will occur if Equity/Market value = 0.30 or less 0.30= (200P - 5,000 - 240)/200P =60P= 200P-5000-240 =60P-200P= -5240 =140P = 5240 P= 5240/140 = 37.43 3 The expected return of this investment using historical data Add the historical returns and then divide by the number of observations. =(-15%)+(-10%)+15%+5%+10% =1% 4 If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the stock's standard deviation 5 A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe measure of 0.42 Sharp Measure: (0.15-0.045)/0.025 = 0.42

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