Sourav

Submitted By belal16264
Words 1937
Pages 8
Finance 3300 - Exam 2

Name _________________________________
Formulas
Two risky assets
E(Rp) = w1 R1 + w2 R2 σp2 = w12 σ12 + w22 σ22 + 2w1w2 ρ12 σ1σ2 ; note to find σp, take square root of σp2

One risk-free and One Risky Asset
E(Rp ) = Rf + σp[(Rm-Rf)/σ2]
E(Rp) = w1 Rf + w2 Rm w1 + w2 = 1 where w1 is % in risk-free asset and w2 is % in risky asset. σp = w2 σ2

CAPM: E(Rp) = rf + β(Rm-rf) σi2 = Σ[Ri - E(Ri)]2/(n-1) σi,m = Σ{[Ri - E(Ri)][Rm - E(Rm)]}/n-1 β = (ρi,m * σi)/σm or β = σi,m / σm2 ρim = σim/σiσm ρ2 or r-square = Explained Var./Total Var. = (βi2 * σm2)/σi2

Multiple Choice
Use the following for the next 3 questions
You are looking at two risky assets, the expected returns, standard deviations, and correlation between the two assets are given below:
E(RA) = 7%, Standard deviation = 12%.
E(RB) = 12%, Standard deviation = 18%.
Correlation between the two assets is 1.0.

1. If you put 50% of your wealth in asset A and the other 50% in asset B, what is the expected return of your portfolio?
A. 18%
B. 9.5%
C. 10.5%
D. 5.4%

2. If you put 50% of your wealth in asset A and the other 50% in asset B, what is the standard deviation of your portfolio?
A. Greater than 18%
B. Greater than 12% but less than 18%
C. Less than 12%

3. All else equal, if the correlation between the two assets became slightly negative,
A. the standard deviation of the portfolio would be zero.
B. the standard deviation of the portfolio would be unaffected.
C. the standard deviation of the portfolio would rise.
D. the standard deviation of the portfolio would fall.

4. An investor develops a portfolio with 25% in a risk-free asset with a return of 6% and the rest in a risky asset with expected return of 9% and standard deviation of 6%. The standard deviation for the portfolio is (a) 20.3%. (b) 4.5%. (c) 0%. (d) 27%.

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