Question

An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 2; $50,000 will be invested in asset D, with a beta of 3; and $30,000 will be invested in asset F, with a beta of 1. The beta of the portfolio is ______.
Select one:
a. 3.4
b. 3.1
c. 2.3
d. 2.2

What is beta of Asset X if the expected return on Asset X is 14%, the expected market return is 10%, and the risk free rate is 6%?
Select one:
a. 0.67
b. 1.00
c. 1.33
d. 2.00

Which of the following is FALSE?
Select one:
a. Two assets whose returns move in the same direction and have a correlation coefficient of +1 are very risky assets.
b. Combining assets that are not perfectly positively correlated with each other can reduce the overall variability of returns.
c. The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.
d. Even if assets are not negatively correlated, the lower the correlation between them, the lower the resulting risk of the portfolio.

Please Solve As soon as
Thank's
Abdul-Rahim Taysir

Answer 1

1)

d. 2.2

Beta of the portfolio is the weighted average of beta of the individual securities

The beta of the portfolio = (20000/100000)*2 + (50000/100000)*3 + (30000/100000)*1

The beta of the portfolio = 2.2

2) d. 2.00

The required rate of return R(e) is calculated by CAPM model

R(e) = r(f) + Beta*(R(m) - r(f))

R(e) = 14%

R(m) is the market return =10%

r(f) is the risk-free rate = 6%

0.14 = 0.06+Beta*(0.10-0.06)

Beta = 2

3)

a. Two assets whose returns move in the same direction and have a correlation coefficient of +1 are very risky assets.

This statement is false. These 2 assets might have very little standard deviation individually, which would make them very less risky.

b) is true as if the portfolio contains stocks with a correlation less than +1, the overall variability will reduce due to diversification effects.

c) is true as

Standard deviation of portfolio =

where x and y are the securities. Here, standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

d) is true for reasons mentioned in part b).

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