1 A portfolio manager adds a new stock B that has the same e

1) A portfolio manager adds a new stock B that has the same expected return as the existing stock A but a standard deviation lower than stock A and has a correlation coefficient with stock A that is close to 0. Adding this stock will have what effect on the expected return of the two-stock portfolio returns? The expected return will:

A) Increase

B) Decrease

C) Stay the same

2) In the Markowitz framework, an investor should most appropriately evaluate a potential investment based on its:

A) Intrinsic value compared to market value.

B) Effect on portfolio risk and return.

C) Expected return.

3) The 3 year holding period return of a security is 12%. What is the annualized return and the annual period yield?

4) Stock A has a standard deviation of 10%. Stock B has a standard deviation of 15%. The covariance between A and B is 0.0105. What is the correlation between A and B?

5) Over the long term, the annual returns and standard deviations of returns for major asset classes have shown:

A) A positive relationship.

B) A negative relationship.

C) No clear relationship.

Solution

1)the expected return will decrease

2)b-effect on portfolio risk and return

Modern portfolio theory concludes that an investor should evaluate potential investments from a portfolio perspective and consider how the investment will affect the risk and return characteristics of an investor