A portfolio comprises two securities and the expected return on them is 12% and 16% respectively. Let us try and find the answers to Joe’s questions. �����]�y�*n~/M�Ev�3��X�`������І�Av��j���������V3t�8e�[�K6���e`6lˠ�Ao҈��9�*z�gzN����Uhi��� It can greatly increase the risk of a portfolio. Solutions to risk and return practice problems 4 . Within the framework of modern portfolio theory, if portfolios A and B have the same return but portfolio A has less risk, then: Our final step would be the plot of the risk and return combined metric, return per unit of risk, which plots the portfolio risk and return for different values of portfolio allocation. The returns and the risk of the portfolio depending on the returns and risks of the individual stocks and their corresponding shares in the portfolio. He also derived a formula for computing the variance/SD of a portfolio. ∴ Portfolio return is 12.98%. Mean portfolio return 12% Var(P) 0.00845 sd(P) 9.2% • The risk of the portfolio is lower than the risk of either of the two stocks! Susan is expecting the returns on the market portfolio to be negative in the near term. 0000002372 00000 n The portfolio return r p = 0.079 with the risk σ p = 0. 0000009547 00000 n xref %%EOF 5. Since she is managing a stock mutual fund, she must remain invested in a portfolio of stocks. 2. Illustration 16.2: Compute the risk return characteristic of an equally weighted portfolio of three securities whose individual risk and return are given in the following table. What is the market risk premium (r M - r RF)? sponding suggested answers. The data has been collected in the Microsoft Excel Online file below. %��������� 0000001420 00000 n Thus: E(R p) = ΣW i R i where i = 1,2,3 … n. Where W i represents the weight attached to asset I and R i is the asset’s return. Risk and Return: Portfolio Theory and Asset Pricing Models ANSWERS TO END-OF-CHAPTER QUESTIONS Please inform us if you spot any errors. Open spreadsheet. 0000006738 00000 n When combining risk though, there is a reduction in portfolio risk relative to the weighted average of the component ... All of the answers indicate that the higher risk exposure is the in Subsidiary A. The concepts of systematic and unsystematic risk are introduced here. startxref The risk-free rate is 5.5%, and the market is in equilibrium. Question: (Graphical representation systematic and unsystematic risk) In the examiners ‘Questions and Answers’ for May 2010, question four (a) required a diagram illustration for systematic and unsystematic risks. 0000001869 00000 n 0000008875 00000 n answers you are looking at involve the examiner having algebraically-rearranged the formulae found on this sheet. Open the spreadsheet and perform the required analysis to answer the questions below. trailer << /Length 5 0 R /Filter /FlateDecode >> Risk and Return Problems and Solutions is set of questions and answers for risk and expected return and its associated cash flows. Individual ... it complicates the task of constructing portfolios with ‘efficient’ risk return trade-off due to the growth of possible asset combinations. the same portfolio of risky securities is a result of: (a) diminishing marginal utility of income (b) covariance (c) the separation theorem (d) the normal distribution assumption 3. 8. CHAPTER 11 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concept Questions 1. 0000006050 00000 n Portfolio 1 is the most efficient portfolio as it gives us the highest return for the lowest level of risk. b. 0000008097 00000 n Questions and Answers ... CFA, is an analyst with a large money management firm. x�]K��Ƒ��W�e#�A�G��lP��� ɢ�q�`� �Cr�yP����_�?�_�_f�Q]��e#��*__=P����~s}���ڵ��?�O�pqw9�?7�닋�U����۽|1�����}yn�����w\$���Oϊ�W�����������/�m�L!��Y1�����]����b��7u]�]�5�[�M���}��]�mM\[�UuL�+��s!��������ҭ_B/t�dl��zO��-ݡߠ�έ�Tݠ����4pqO��5���W=���+�GkW���+w�7e��v�r����� ��Uy�>���ZE'©�)5�U}�5M��������׿ʟW����g�8~�n����I ��T�b4V]�hl����\��CD|��ݻ@������D���{'���O!�n>�Ǳ�)��\$�[wu��\$N�"2ؙ,SH���Dc��՝��U������ �����mU�Mӷ4L�^��?�����:L�oߺ�W��!g\����;�r���&:�weU�j�1��.��MU���D�c�uH� �־~M�Y��&/v7_4��xe����.�uG� =��eL{w���qkBz�5��v�w]��6#ߵ͘�2���F�GN�@���B���1�F�dXU�T���1��[2��Y��uUyTW�3��. Since the return of a portfolio is commensurate with the returns of its individual assets, the return of a portfolio is the weighted average of the returns of its component assets.The dollar amount of an asset divided by the dollar amount of the portfolio is the weighted average of the asset and the sum of all weighted averages must equal 100%. 0000002905 00000 n 0000003948 00000 n 4 0 obj the concept of portfolio risk. 10 Key Points To Remember. 0000007457 00000 n View Test Prep - Risk and Return Practice Problems with Solutions.pdf from BA D1 at Brenau University. 0000038699 00000 n If the portfolio is comprise of 40% X and 60% Y and if the correlation between the returns on X and Y is -0.25, what is the portfolio’s expected return and risk? Probability Possible rate of return 0.25 0.09 Risk and return questions and practice problems Risk and return part 2: Questions 1. The expected return – beta relationship is the implication of the CAPM that security risk premiums (expected excess returns) will … 1417 27 0000003371 00000 n a. total return … total risk b. expected return … total risk c. total return … systematic risk d. expected return … systematic risk 13. ... “Existing investment portfolio: aggressive Findings of risk-profiling questionnaire: conservative” The risk premium of an asset is proportional to its beta. Following are the probability distribution of returns of portfolio of Stock A and Stock B in equal proportion of weight in each state of economy. Risk and Return Discussion/Practice Problems … ���s��6?Y��V#P9l`�'��R؃K�ӽ�N��_�RV*�yU���[���\��C�X��9�Ɂ�KzN�ْ�P�+��YJ����� � �V"�P�uw��0l0 Question: RISK AND RETURN You Own A Portfolio Consisting Of The Following Stocks. Determine return of portfolio if first security constitutes 40% of total portfolio. 0000002012 00000 n Portfolio expected return is the sum of each of the individual asset’s expected return multiplied by its associated weight. %PDF-1.3 Answer. The risk-return relationship will now be measured in terms of the portfolio’s expected return and the portfolio… 0000008829 00000 n You will get 30 minutes to complete the test. Portfolio return is 12.98%. 0000003333 00000 n 0000000016 00000 n 0000003621 00000 n {\G����M�ѕ�y�C. Portfolio risk is what matters to investors and portfolio risk is what governs the risk premiums they demand. By investing in a variety of assets, this unique portion of the total risk can be eliminated at little cost. 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