Question

In this exercise you are choosing between the following investment strategies:

Invest $200 in stock A. Stock A costs $20 per share. Expected yield per share of stock A is $2, and the variance of yield per share is 9 ($-squared).

Invest $200 in stock B. Stock B costs $10 per share. Expected yield per share of stock B is $0.90, and the variance of yield per share is 1 ($-squared).

Invest $100 in stock A and $100 in stock B. The correlation between yield per share of stock A and yield per share of stock B is 0.12.

1)With strategy (iii), how many shares of stock A and stock B do you buy?

a) 10 shares of A and 20 shares of B

b) 5 shares of A and 10 shares of B

c)10 of each

d) 20 of each

2)What is the value of the covariance between the yield on a share of stock A and the yield on a share of stock B?

a) 0.16

b)0.12

c) 1.08

d) 0.36

3) When will portfolio (iii) lose money?

a) When the yield on portfolio (iii) is less than the expected yield on portfolio (iii)

b) When the yield on portfolio (iii) is negative

c) When the yield on stock A is negative and the yield on stock B is negative

d)When the yield on stock A is negative or the yield on stock B is negative

Answer 1