Port Mathematics

What is the expected returns of portfolio? Given

S&P 500: Weight = 0.5, expected return = 13%

US long-term corporate bonds: Weight = 0.25, expected return = 6%

MSCI EAFE: Weight = 0.25, expected return = 15%

• 11.00%

• 11.25%

• 11.75%

US and Spanish bonds returns measured in the same currency units have standard deviations of 0.64 and 0.56, respectively. If the correlation between the two bonds is 0.24, the covariance of returns is closest to:

• 0.086

• 0.335

• 0.390

2. The covariance of returns is positive when the returns on two assets tend to:

• have the same expected values.

• be above their expected value at different times.

• be on the same side of their expected value at the same time.

Which of the following correlation coefficients indicates the weakest linear relationship between two variables?

• –0.67

• –0.24

• 0.33

All else being equal, as the correlation between two assets approaches +1.0, the diversification benefits:

• decrease.

• stay the same.

• increase.

Given a portfolio of five stocks, how many unique covariance terms, excluding variances, are required to calculate the portfolio return variance?

• 10

• 20

• 25

Which of the following statements is most accurate? If the covariance of returns between two assets is 0.0023, then the:

• assets’ risk is near zero.

• asset returns are unrelated.

• asset returns have a positive relationship.

Stock 1: Expected return = 7%, standard deviation = 12%, portfolio weights = 0.30

Stock 2: Expected return = 10%, standard deviation = 25%, portfolio weights = 0.70

Correalation = 0.2

What is the standard diviation of the portfolio return?

• 14.91 percent

• 18.56 percent

• 21.10 percent

According to the safety-first criterion, which of the three allocations is the best?

• 0.787037 = (25 − 3.75)/27

• 0.90625 = (11 − 3.75)/8

• 0.5125 = (14 − 3.75)/20

An analyst produces the following joint probability function for a foreign index (FI) and a domestic index (DI).

RDI = 30%, RFI = 25%: 0.25

RFI = 15%, RDI = 25%: 0.50

RFI = 10%, RDI = 15%: 0.25

The covariance of returns on the foreign index and the returns on the domestic index is closest to:

• 26.39

• 26.56

• 28.12