Exam 7: Risk and Return

An investor would like to evaluate the performance of her portfolio using the Treynor ratio.The past year realised return and systematic risk of the portfolio,the benchmark portfolio,given by the S&P/ASX share price index,and government bonds are: Has the portfolio:

A security market line:

Suppose you have the choice between two investments - one that pays fixed interest of 4% p.a. ,and another whose returns are normally distributed with an expected return of 10% and standard deviation of 3%.What is the likelihood of receiving a return on the second investment that is equal to or greater than that which can be received from the first investment? (Hint: the area under a curve for 1 std dev is 34.13%,2 std dev is 47.73% and 3 std dev is 49.87%. )

The Fama-French three-factor model of expected returns includes the following three factors:

The efficient frontier:

Variance is best defined as:

Beta is calculated by finding the co-variance between the return on the asset and the return on the market and dividing it by the variance of the return on the market.

Mehra and Prescott (1985)showed that a long-term risk premium such as that found in the US,Canada,the UK and Australia:

An investor's preferences regarding expected return and risk can be illustrated using:

Which statement best describes the attitude of investors towards risk?

It is often assumed that an investment's distribution of returns follows a normal distribution because:

From the following information,calculate the expected return and standard deviation of a portfolio that consists of 60% of Security A (expected return of 0.10 and standard deviation of 0.03)and 40% of Security B (expected return of 0.20 and standard deviation of 0.05),assuming the co-variance between A and B is -0.0012.

Increasing the amount of wealth in Asset A whilst maintaining the entire wealth invested in a portfolio consisting of two assets only,A and B (assume that the expected return and standard deviation of both assets are A: 0.10 and 0.03,and B: 0.15 and 0.05,respectively):

Explain the difference between systematic and unsystematic risk.

Which statement best describes the market portfolio?

A risk-averse investor attaches:

Examine the following probability distribution: The mean,range and standard deviation are:

Which of the following investments does a rational investor prefer?

Suppose that the returns on an investment are normally distributed with an expected return of 16% and standard deviation of 3%.What is the likelihood of receiving a return that is equal to or less than 19%? (Hint: the area under a curve for 1 std dev is 34.13%,2 std dev is 47.73% and 3 std dev is 49.87%. )

You are considering investing in ZIN mining corp.Research into the company suggests that the company will achieve one of three possible returns over the next 12 months.The possible returns along with the probability of each are listed in the following table. a.What is the expected return of ZIN? b.What is the standard deviation of returns of ZIN? You also consider the stock WMC,which has an expected return of 15% and a standard deviation of 4%.If you create a portfolio with 60% weight on ZIN and 40% WMC and the correlation coefficient is 0.8,then: c.What is the expected return of this portfolio? d.What is the risk of the portfolio?