Question

Suppose, during a given year, the return on an equal-weighted portfolio consisting of the 500 stocks in the S&P 500 is lower than the actual return on the S&P 500 (which is value-weighted). This means that the return of smaller stocks is _________ the return of larger stocks during the year.

A) higher than B) lower than C) equal to D) more volatile than

Answer #1

Option (B) : Lower than

Explanation:

The value-weighted portfolio created out of all S&P stocks
have all the stocks whether smaller cap or larger cap in equal
proportion based on the weights given on the basis of their market
cap.

However, the actual S&P index comprises of stocks in proportion to their market value weights. In other words, the stocks withb highest market cap has the highest weight and hence the highest proportion.

Now, since the return on actual S&P exceeded the portfolio return, it means that the returns of large cap stocks were higher than the lower cap stock.

i.e. Return on smaller stocks is lower than the return on larger stocks.

A well-diversified portfolio has an expected return that is
_______ the weighted average of the expected returns of the assets
inside of it and a risk level that is _______ the weighted average
of the risk levels of the assets inside of it.
Pick one of the choices below to fill in the blanks above in
order.
Select one:
Higher Than; Higher Than
Higher Than; Equal To
Higher Than; Lower Than
Equal To; Higher Than
Equal To; Equal To
Equal...

Last year your portfolio of small cap stocks produced a return
of 32%. The S&P 500 had a return of 26% for the same period.
Your portfolio had a beta of 2 and a standard deviation of 34%. The
S&P had a standard deviation of 22% and the risk free rate was
8.0%.
Calculate the Sharpe Ratio, Treynor
Ratio, and Jensen’s Alpha for your portfolio.
Discuss (in depth/be thorough) how your portfolio
performed last year.

Given the information in the table below, an equally weighted
portfolio of stocks A, B, and C has a standard deviation equal to
7%
Stock
Expected Return
Standard Deviation
Correlation with A
Correlation with B
Correlation with C
A
10%
7%
1
B
10%
7%
0
1
C
10%
7%
0
0
1
Statement: An equally weighted portfolio of stocks A, B, and C
has a standard deviation equal to 7%. (True or False ? Explain if
True or False)

Suppose there are 500 stocks, all of which have a standard
deviation of 0.30, and a correlation with each other of 0.4.
(a) Calculate the variance of an equally-weighted portfolio of n
such stocks, for n = 2,4,10, 20,50,100,500. Graph your results.
(b) Does the variance of this portfolio tend to zero as n → ∞
(that is, if there were many more than 500 stocks)? If so, explain
why. If not, what does it converge to then?
(c) Repeat...

Q4. Suppose you develop a mutual fund that includes 500 NASDAQ
stocks, all with equal weights in the fund's portfolio. The average
return standard deviation of the stocks is 44 percent, and the
average pairwise correlation among the stocks is 0.30. What is your
estimate of the standard deviation of the fund's portfolio?

The expected return on the NASDAQ portfolio is 17.5% and
its return volatility is 30%. The risk-free rate is 2.5%. You think
that you can create a portfolio with the same expected return but
lower risk by (1) putting 50% of your money into the portfolio of
large world stocks with the expected return of 10% and return
volatility of 20%; (2) putting the remaining 50% of your money into
the portfolio of small US stocks with the expected return...

1. Two investment advisors are comparing performance. Advisor A
averaged a 15% return with a portfolio beta of 1.5, and advisor B
averaged a 15% return with a portfolio beta of 1.2. If the T-bill
rate was 5% and the market return during the period was 13%, which
advisor was the better stock picker?
A. Advisor A was better because he generated a larger alpha.
B. Advisor B was better because she generated a larger
alpha.
C. Advisor A was...

. The average return on the stocks in the S&P 500(stock with
500 companies) over the past 90 years has been 9.8% and the
standard deviation has been about 15%.
(a) Infer that you take a simple random sample of 50 companies
from the S&P 500. You calculate an average return of X¯ for
this sample. What is the distribution of X¯?
(b) Continuing from part (a), for a simple random sample of 50
companies, what is the probability that...

Troy wants to form a portfolio of four different stocks.
Summary data on the four stocks appears below. The average standard
deviation (found simply by summing the standard deviations and
dividing by 4 which is the same as the weighted average in this
example) across the four stocks is 17.25%. If Troy forms a
portfolio by investing 25% of his money in each of the stocks in
the table, it is very likely that the standard deviation of this
portfolio’s...

Suppose you would
like to invest in world stocks generating an expected return of
10%, but do NOT have
access to so many different capital markets. However, you can
invest in the S&P 500 (expected return of 12%) and Treasury
Bills (expected return of 4%). Can you construct a portfolio from
the S&P 500 and Treasury Bills to replicate the expected return
of the world stocks?

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