Chapter 7 - Portfolio Analysis: Risk and Return in Financial Markets | Finance and Financial Markets by Keith Pilbeam

1. You buy a share for £8 and for two years the Company pays a dividend of £0.50 per year and the stock itself is valued at £10 two years hence. The annualised rate of return is approximately:

25% 37.5% 12.5% 17.3%

2. The following data on the rates of return on two stocks are: Year Stock A Stock B

Year	Stock A	Stock B
1	-10%	-4%
2	15%	21%
3	28%	40%
4	14%	8%
5	33%	25%

The weighted average return of a portfolio invested 40% in Stock A and 60% in Stock B is:

lower than the rate of return on stock A higher than the rate of return on stock B lower than 17.4% none of the above

3. You have the following estimated annual returns on stocks A, B and C

Economy	Probability	Stock A	Stock B	Stock C
Good	0.4	15%	30%	18%
Fair	0.2	10%	10%	16%
Bad	0.4	5%	-10%	10%

The expected return and standard deviation of each stock are respectively:

Stock A (10%, 4.47%), Stock B (10%,17.89%), Stock C (14.4%, 3.67%) Stock A (10%,5.23%), Stock B (10%, 10%), Stock C (14.4%, 4.47%) Stock A (12%, 5.0%), Stock B (10%, 20%), Stock C (14.4%, 4.47%) None of the above

4. The risk free rate of return is 5%, the return on the market portfolio is 10% and the standard deviation of the market is 30%. If a combination of the risk free asst and market portfolio has a standard deviation of 12% then the expected return on this portfolio is:

10% 5% 6% 7%

5. The standard deviation of a portfolio made up of two risky securities with a correlation coefficient of +0.5 is:

a weighted average of the standard deviations of the securities in the portfolio less than the weighted average of the standard deviations of the securities in the portfolio more than the weighted average of the standard deviations of the securities in the portfolio higher than the standard deviation of the security with the highest standard deviation

6. A key characteristic of the market portfolio is that it:

has the lowest risk of any efficient portfolio. has the highest return of any efficient portfolio. has the highest return per unit of risk of any efficient portfolio. does not include any inefficient assets.

7. You are given the following data:

Portfolio	Expected rate of return	Standard deviation of returns
1	10%	20%
2	12%	22%
3	15%	25%
4	20%	30%

The risk free rate of interest is 5%. Which portfolio offers the best return per unit of risk?

Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4