P04 - Risks (Sol)

MANAGEMENT ADVISORY SERVICES

RISKS

Portfolio Beta 1 . You You invet !"## !"## in e$urit% e$urit% A &it' &it' a (eta of 1.) an* !+## !+## in e$urit% e$urit% B &it' &it' a (eta of ,#.)#. T'e (eta of t'e reultin- ortfolio i /M0 a. 1.+#. $. #.". (. 1.##. *. #."+. e. #.2# #.2#.. Bo*ie Bo* ie )

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A $o3an% $o3an% 'ol* 'ol* t'e t'e follo&infollo&in- to$4 to$4 ortfol ortfolio5 i o5 Sto$4 6 of Total Portfolio 7 )# 6 8 +# 6 Y # 6 9 1# 6 T'e (eta of t'e ortfolio i /M0 A. ).# C. .: B. 1.1 D. .2

+

T'e 3ar4et 3ar4et value of t'e 'are 'are of Atroiel* Atroiel* Cororation on i $urrentl% !)+ 3illion< ion< an* t'eir (eta i 1.+. Atroiel* 'a a no3inal !" 3illion of 26 $ouon *e(enture outtan*in- &'i$' 3ature in ? %ear. T'ee *e(enture 'ave a (eta of #.1< an* t'e% $urrentl% %iel* 1#6. 7'at i t'e (eta of Atroiel* aet> /VD0 A. #.2) C. ).= B. #.?= D. 1.1" Glei3

=

Co3uSolution Co3uSolution In$. In$. to$4 'ave 'ave a total 3ar4et 3ar4et value ue of !=# 3illion lion an* a *e(t *e(t of !# 3illion. llion. T'e $urrent Treaur% (ill rate i "6< an* t'e e@e$te* 3ar4et ri4 re3iu3 i :6. A lot of t'e return on t'e to$4 a-aint t'e 3ar4et return 'o& a $atter of oint t'rou-' &'i$' a line $an (e fitte* &it' a loe of +=. 7'at i t'e (eta of t'e $o3an% aet> /D0 A. 1.)= C. 1.?= B. #.")= D. 1.""? Glei3

"

Ariona  ona Ro$4< Ro$4< an all,e;u all,e;uit% it% fir3< fir3< $urrent $urrentl% l% 'a a (eta of 1.)=< 1.)=< 4R  F ? er$ent< er$ent< an* 4M F 1+ er$ent. Suoe t'e fir3 ell 1# er$ent of it aet &it' (eta F 1.)= an* ur$'ae t'e a3e roortion of ne& aet &it' a (eta of 1.1. 7'at &ill (e t'e fir3 ne& overall re;uire* rate of return< an* &'at rate of return 3ut t'e ne& aet ro*u$e in or*er to leave t'e to$4 ri$e un$'an-e*> /M0 a. 1=."+=6H 1=."+=6 *. 1=.?=#6H 1=."+=6 (. 1=.?=#6H 1+.?##6 e. 1+.?=#6H 1=.?=#6 $. 1= 1=."+=6H 1+.?##6 Bri-'a3

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PORTF0LIO MANAGEMENT Beta 

Beta Coeffi$ient .2 ." 1 .# ) .#

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Glei3

Beta of Ne& Sto$4 in t'e Portfolio . You You are 3ana-in- a ortfolio ortfolio of five five to$4 t'at are are 'el* in e;ual a3ount. a3ount. T'e $urrent $urrent (eta of t'e ortfolio i 1.+< an* t'e (eta of Sto$4 A i 1.=. If Sto$4 A i ol*< &'at &oul* t'e (eta of t'e rela$e3ent to$4 'ave to (e to ro*u$e a ne& ortfolio (eta of 1.)=> /D0 A. #.?= C. 1.)= B. #.:# D. 1.+# Glei3



Aet Beta =. T'e (eta of *e(t *e(t i #.+ an* (eta (eta of e;uit% i 1.). T'e *e(t,e;uit% *e(t,e;uit% ratio i #.2. Cal$ulate Cal$ulate t'e (eta of t'e aet of t'e fir3. /Au3e no ta@e.0 A. #.: C. 1." B. #.+2 #.+2 D. None None of t'e t'e a(ov a(ovee BM ". A fir3 e;uit% (eta i #.2 an* an* t'e *e(t (eta i #.. If t'e 3ar4et 3ar4et value of *e(t i !+# 3illion lion an* t'at of e;uit% i !1"# 3illion< &'at i t'e (eta of t'e aet of t'e fir3> A. #.? C. 1.1 B. #.2 #.2 D. None None of t'e t'e a(ov a(ovee BM

E;uit% Beta 2. A fir3 aet (eta i #.= an* *e(t (eta i ero. If t'e *e(te;uit% *e(te;uit% ratio i 1."< &'at i t'e e;uit% (eta of t'e -iven> A. #.2 C. 1.# B. 1. 1. D. None None of t'e t'e a(ov a(ovee BM ?. T'e ree,loat oat Co3an%< Co3an%< a $o3an% in t'e "6 ta@ (ra$4et< 'a ri4le *e(t in it $aital tru$ture &'i$' 3a4e u +#6 of t'e total $aital tru$ture< an* e;uit% i t'e ot'er "#6. T'e (eta of t'e aet for t'i (uine i #.2 an* t'e e;uit% (eta i5 A. #.2# C. #.= C. B. #.?  D. 1 .1 .1+ BM Diviion Beta ? . Sun State Mininnin- In$.< an all,e;uit% ,e;uit% fir3< r3< i $oni*erin*erin- t'e for3ation for3ation of a ne& *iviion ion t'at &ill in$reae t'e aet of t'e fir3 (% =# er$ent. Sun State $urrentl% 'a a re;uire* rate of return

RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

Pa-e 1 of ""

MANAGEMENT ADVISORY SERVICES of 12 er$ent< . S. Treaur% (on* %iel* ? er$ent< an* t'e 3ar4et ri4 re3iu3 i = er$ent. If Sun State &ant to re*u$e it re;uire* rate of return to 1" er$ent< &'at i t'e 3a@i3u3 (eta $oeffi$ient t'e ne& *iviion $oul* 'ave> /D0 a. ).) *. 1." (. 1.# e. ).# $. 1 .2 Bri-'a3 Given t'e Correlation Coeffi$ient (et&een t'e Sto$4 an* Mar4et Portfolio +1. T'e $orrelation on $oeffi$ient ent (et&een to$4 A an* t'e 3ar4et ortfolio io i L#.". T'e tan*ar* *eviation *eviation of return of t'e to$4 i #6 an* t'at of t'e 3ar4et ortfolio i )#6. Cal$ulate Cal$ulate t'e (eta of t'e to$4. A. #.: C. 1.1 B. 1.# D. #." BM +). T'e $orrelation $orrelation $oeffi$ient $ient (et&een (et&een to$4 B an* t'e 3ar4et ortfolio ortfolio i #.2. T'e tan*ar* tan*ar* *eviation of t'e to$4 B i =6 an* t'at of t'e 3ar4et i )#6. Cal$ulate t'e (eta of t'e to$4. A. 1.# C. #.2 B. 1.+ D. #.? BM Given t'e itori$al No3inal Return for t'e Sto$4  Mar4et Portfolio +. itori$al $al no3inal return return for to$4 A i 26< L1#6 an* L))6. L))6. T'e no3inal no3inal return for t'e 3ar4et ortfolio i L"6< L126 an* )+6. Cal$ulate t'e (eta for to$4 A. A. 1."+ C. 1.# C. B. #."1 #."1 D. None None of t'e t'e a(ov a(ovee BM ++. T'e t'ree %ear %ear annual return for to$4 to$4 B $o3e $o3e out to (e #6< 1#6 an* )"6. )"6. T'ree %ear annual return for t'e 3ar4et ortfolio are L"6< 126< )+6. Cal$ulate t'e (eta for t'e to$4. A. 1." C. # B. #.?+ #.?+ D. None None of t'e t'e a(ov a(ovee BM Required Return 2

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.G. Penn%a$4er Penn%a$4er i interete* interete* in fin*in- t'e t'e aroriate aroriate *i$ount rate rate for it ne& ne& roe$t for for 3a4in- (lue< in4< an* %ello& &i*-et. T'e avera-e (eta of a -rou of $olore* &i*-et 3anufa$turer i 1.+ an* t'eir avera-e *e(t,e;uit% ratio i #.#. Penn%a$4er lan to 'ave a *e(t,e;uit% ratio of #.)#. If t'e ri4,free rate i "6 an* t'e e@e$te* ri4 re3iu3 on t'e 3ar4et ortfolio i :6< &'at i t'e re;uire* return for t'e roe$t> /D0 A. :.?)6 C. 1".#26 B. ?.#26 D. 1=.?)6 Glei3

RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

MANAGEMENT ADVISORY SERVICES

RISKS

Expected Return

)2. Sto$4 A 'a 'a an e@e$te* return of 1#6 er %ear an* to$4 B 'a an e@e$te* return of )#6. If ==6 of t'e fun* are invete* in to$4 B< &'at i t'e e@e$te* return on t'e ortfolio of to$4 A an* to$4 B> A. 1#6 C. 1+.=6 C. B. )#6 )#6 D. None None of t'e t'e a(ov a(ovee BM 12. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6 A. )#2 C. 122 B. )= )= D. None None of t'e t'e a(ov a(ovee BM

)#. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6 A. =#6 =#6 in 8 an* =#6 in Y C. )#6 in 8 an* 2#6 2#6 in Y B. )=6 )=6 in 8 an* ?=6 in Y D. None None of t'e t'e a(ove a(ove BM

Prt!"i $tandard %e&iatin 11

. 7'at i t'e tan*ar* tan*ar* *eviation *eviation of t'e follo&infollo&in- t&o,to$4 t&o,to$4 ortfolio> ortfolio> /VD0 /VD0 7ei-'tinStan*ar* Deviation Correlation Sto$4 A "# 6 116 .? Sto$4 B +# 6 1+6 A. 11.)=6 C. 1).=#6 B. 1).)#6 D. 1)".""6 CM Sa3le J),: RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

MANAGEMENT ADVISORY SERVICES

Mini'u' #ariance Prt!"i

Proortion of Invet3ent )1. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6 A. 1#6 C. 1).)6 C. B. )#6 )#6 D. None None of t'e t'e a(ov a(ovee BM

Risk-Adjusted Rate ! Return 1#

. Dan*% Dan*% Pro*u$t Pro*u$t overall overall &ei-'te* &ei-'te* avera-e avera-e re;uire* re;uire* rate of return i 1# er$ent. er$ent. It %o-urt %o-urt *iviion i ri4ier t'an avera-e< it fre' ro*u$e *iviion 'a avera-e ri4< an* it intitutional foo* *iviion 'a (elo&,avera-e ri4. Dan*% a*ut for (ot' *iviional an* roe$t ri4 (% a**in- or u(tra$tin- ) er$enta-e oint. T'u< t'e 3a@i3u3 a*ut3ent i + er$enta-e oint. 7'at i t'e ri4,a*ute* re;uire* rate of return for a lo&,ri4 roe$t in t'e %o-urt *iviion> /E0 a. "6 *. 1)6 (. 26 e. 1+6 $. 1 # 6 Bri-'a3

Prt!"i #ariance

1?. T'e 'itori$al $al return *ata for t'e at t'ree %ear %ear for Sto$4 B an* t'e to$4 3ar4et ortfolio ortfolio are5 Sto$4 B5, )+6< #6< )+6< Mar4et Portfolio5, o5, 1#6< 1)6< )#6. Cal$ulate Cal$ulate t'e varian$e in t'e 3ar4et. A. 1:) C. 1)2 B. )2 D. None None of t'e t'e a(ov a(ovee BM 1:. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6 A. 1+.+6 C. 16 C. B. 126 126 D. None None of t'e t'e a(ov a(ovee BM Mini'u' Prt!"i Risk

Proortion of Invet3ent =. Sto$4 Sto$4 A 'a an e@e$t e@e$te* e* return return of )#6 an* Sto$4 Sto$4 B 'a an e@e$te* e@e$te* return return of 1)6. T'e ri4ine ri4ine of to$4 A a 3eaure* (% t'e varian$e i t'ree ti3e t'at of to$4 B. If t'e $orrelation $orrelation $oeffi$ient $oeffi$ient (et&een t'e t&o to$4 i ero< &'at roortion on of invet3ent invet3ent in ea$' to$4 -ive t'e 3ini3u3 ortfolio varian$e /3ini3u3 ri40> A. =#6 in Sto$4 Sto$4 A an* =#6 =#6 in Sto$4 Sto$4 B B. )=6 in Sto$4 Sto$4 A an* ?=6 ?=6 in Sto$4 Sto$4 B C. ?=6 in Sto$4 Sto$4 A an* )=6 )=6 in Sto$4 Sto$4 B D. None None of of t'e t'e a(ov a(ovee BM ?. Sto$4 Sto$4 8 'a an e@e$te* e@e$te* return return of )#6 an* Sto$4 Sto$4 Y 'a an e@e$te e@e$te** return return of 1#6. T'e ri4ine of Sto$4 8 a 3eaure* (% t'e tan*ar* *eviation of return i t&i$e t'at of Sto$4 Y. If t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at roortion of t'e invet3ent in ea$' to$4 -ive t'e leat ortfolio ri4 /3ini3u3 ortfolio ri40> A. =#6 =#6 in 8 an* =#6 in Y C. )#6 in 8 an* 2#6 2#6 in Y B. )=6 )=6 in 8 an* ?=6 in Y D. None None of t'e t'e a(ove a(ove BM

Prt!"i $tandard %e&iatin 11

. 7'at i t'e tan*ar* tan*ar* *eviation *eviation of t'e follo&infollo&in- t&o,to$4 t&o,to$4 ortfolio> ortfolio> /VD0 /VD0 7ei-'tinStan*ar* Deviation Correlation Sto$4 A "# 6 116 .? Sto$4 B +# 6 1+6 A. 11.)=6 C. 1).=#6 B. 1).)#6 D. 1)".""6 CM Sa3le J),: RPCPA< AICPA< CMA  CIA E8AMINATION JESTIONS

MANAGEMENT ADVISORY SERVICES A. C5 C5 =#6 MC5 MC5 =#6 B. C5 C5 )=6 MC5 MC5 ?=6

Mini'u' #ariance Prt!"i

Proortion of Invet3ent )1. lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6 A. 1"6 C. 1)6 B. 1+6 D. )#6 D. BM 2. Sto$4 Sto$4 8 'a an e@e$te* e@e$te* return return of )#6 an* an* to$4 Y 'a 'a 1#6. T'e ri4in ri4ine e of Sto$4 Sto$4 8 a 3eaure* (% t'e tan*ar* *eviation *eviation of t'e return i t&i$e t'at of Sto$4 Y. Y. If t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at i t'e e@e$te* return on t'e ortfolio &it' 3ini3u3 ri4 /3ini3u3 varian$e ortfolio0> A. )#6 C. 1)6 B. 1=6 D. 1#6 BM )). lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6 A. 122 C. )#2 B. 1:" 1:" D. None None of t'e t'e a(ov a(ovee BM E@e$te* Return ". Sto$4 Sto$4 A 'a an e@e$t e@e$te* e* return return of )#6 an* Sto$4 Sto$4 B 'a an e@e$te* e@e$te* return return of 1)6. T'e ri4ine ri4ine of Sto$4 A a 3eaure* 3eaure* (% t'e varian$e i t'ree ti3e t'at of Sto$4 Sto$4 B. If t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at i t'e e@e$te* return on t'e 3ini3u3 varian$e ortfolio> A. 1"6 C. 1)6 B. 1+6 D. )#6 D. BM 2. Sto$4 Sto$4 8 'a an e@e$te* e@e$te* return return of )#6 an* an* to$4 Y 'a 'a 1#6. T'e ri4in ri4ine e of Sto$4 Sto$4 8 a 3eaure* (% t'e tan*ar* *eviation *eviation of t'e return i t&i$e t'at of Sto$4 Y. Y. If t'e $orrelation $oeffi$ient (et&een t'e t&o to$4 i ero< &'at i t'e e@e$te* return on t'e ortfolio &it' 3ini3u3 ri4 /3ini3u3 varian$e ortfolio0> A. )#6 C. 1)6 B. 1=6 D. 1#6 BM )). lori*a Co3an% Co3an% /C0 an* Minneota Minneota Co3an% Co3an% /MC0 are (ot' ervi$e ervi$e $o3anie. $o3anie. T'eir 'itori$al return for t'e at t'ree %ear are5 C5 ,1#6