Question

Suppose stocks offer an expected rate of returns of 10% with a standard deviation of 20%,...

Suppose stocks offer an expected rate of returns of 10% with a standard deviation of 20%, and gold offers an expected return of 5% with a standard deviation of 25%. (i) If the correlation between gold and stocks is sufficiently low, gold ______ be held as a component in the optimal portfolio. (ii) If the correlation coefficient between gold and stocks is 1.0, then gold ______ be held as a component in the optimal portfolio.       

Question 1 options:

A)

(i) will; (ii) will not

B)

(i) will not; (ii) will

C)

(i) will; (ii) will

D)

(i) will not; (ii) will not

Suppose GM (General Motors) has a beta equal to 1.1 and its stock returns’ standard deviation is 50%. Suppose GOOG (Google) has a beta equal to 2.2 and its stock returns’ standard deviation is 30%.

     (i) If you want to include the less risky one into your well diversified portfolio, you will choose ___(i)___ .

     (ii) If you want to include the less risky one to form your single-stock (i.e., undiversified) portfolio, you will choose ___(ii)___ .

Question 2 options:

A)

(i) GM; (ii) GM

B)

(i) GM; (ii) GOOG

C)

(i) GOOG; (ii) GM

D)

(i) GOOG; (ii) GOOG

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

Question 3 options:

A)

large market capitalization and high book-to-market ratio

B)

large market capitalization and low book-to-market ratio

C)

small market capitalization and high book-to-market ratio

D)

small market capitalization and low book-to-market ratio  
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Homework Answers

Answer #1

1. If correlation is low then gold will be held as a component, if correlation is 1 then gold will not be held as a component.
Option A is correct option.

2. Higher is the beta, more is the risk of stock, lower is the beta lower is the risk of stock.
For less risky portfolio you would choose GM. For more risky portfolio you would choose Google.
Option b is correct option.

3. Option c is correct option.Small market capitalization and high book-to-market ratio



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