Question

QUESTION 62

1. You invest $100 in the market portfolio with an expected return of 12% and a standard deviation of 15%, and a T-bill that pays 5%. If you desire to form a portfolio with an expected return of 10%, what percentages of your money must you invest in the market portfolio?

45.3%

65.5%

71.4%

83.5%

85.24%

1 points   

QUESTION 63

1. The market portfolio has an expected return of 12% and a standard deviation of 20 %. The standard deviation of ABC Company's stock is 40% and its correlation coefficient with the market portfolio is 0.6.What is the beta of ABC's stock?

0.75

0.9

0.95

1.0

1.2

Answer 1

QUESTION 62:

Assume that market portfolio’s weight in Portfolio = x

And risk free rate (T-bills)’s weight in Portfolio = 1-x

Therefore,

Expected return of portfolio = x * Expected return of market portfolio + (1-x) * Expected return of T-bill

Where,

Expected return of portfolio = 10%

Expected return of market portfolio = 12%

Expected return of T-bill = 5%

Now putting the values in above equation, we get

10% = x * 12% + (1-x) * 5%

Or 10% - 5% = (12% – 5%)* x

Or 5% = 7% * x

Or x = 5%/7% = 0.714 or 71.4%

Therefore the portfolio weight of market in your portfolio is 0.714 or 71.4%

Therefore correct answer is option: 71.4%

QUESTION 63:

Beta of stock ABC = (Correlation coefficient between the market returns and Stock ABC return * Standard deviation of stock ABC) / standard deviation of the market return

= (0.6 * 40%)/ 20%

= 1.2

The beta of ABC's stock is 1.2

Therefore correct answer is option: 1.2