Question 1

CSL, a pharmaceutical company, has a beta of 1.1, and Woolworths has a beta of 1.0. The risk-freerate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in CSL and the balance in Woolworths?

Accepted Answer

The expected return on the portfolio is calculated using the Capital Asset Pricing Model (CAPM). First, calculate the expected return for each stock: CSL = 4% + 1.1 * 6% = 10.6%, Woolworths = 4% + 1.0 * 6% = 10%. The portfolio return is the weighted average: 0.5 * 10.6% + 0.5 * 10% = 10.3%.

Question 2

Use the table for the question(s) below.
Consider the following returns:
$\begin{array} { l c c c } 
\hline \text { Year-End } & \begin{array} { c } 
\text { ANZ } \
\text { Realised } \
\text { Return }
\end{array} & \begin{array} { c } 
\text { WOW } \
\text { Realised } \
\text { Return }
\end{array} & \begin{array} { c } 
\text { BHP } \
\text { Realised } \
\text { Return }
\end{array} \
\hline 2007 & 20.1 \% & - 14.6 \% & 0.2 \% \
\hline 2008 & 72.7 \% & 4.3 \% & - 3.2 \% \
\hline 2009& - 25.7 \% & - 58.1 \% & - 27.0 \% \
\hline  2010& 56.9 \% & 71.1 \% & 27.9 \% \
\hline  2011& 6.7 \% & 17.3 \% & - 5.1 \% \
\hline  2012 & 17.9 \% & 0.9 \% & - 11.3 \% \
\hline &
\end{array}$
-The volatility on ANZ returns is closest to?

Accepted Answer

D

Question 3

Suppose you invest in 100 shares of BHP at $40 per share and 200 shares of ANZ at $25 per share. If the price of BHP increases to $50 and the price of ANZ decreases to $20 per share, what is the return on your portfolio?

Accepted Answer

D

Question 4

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have betas.

Accepted Answer

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have low betas.

Question 5

Diversification reduces the risk of a portfolio because and some of the risks are averaged out of the portfolio.

Accepted Answer

Diversification helps to reduce the risk because share prices do not move identically, meaning that some stocks may go up while others go down, resulting in an overall average movement that is less volatile. A and B are incorrect because diversification does not eliminate all risks, and some risks are specific to individual firms or are unrelated to market movements. D is also incorrect because while share prices may be unpredictable, diversification still helps to mitigate some of the risk associated with unpredictable movements.

Question 6

Which of the following statements is FALSE?

Accepted Answer

The tangent line that goes through the market portfolio is called the Capital Market Line (CML), not the Security Market Line (SML). The SML represents the expected return of a security as a function of its beta with the market.

Question 7

Which of the following statements is FALSE?

Accepted Answer

The statement "Almost all of the correlations between shares are negative, illustrating the general tendency of shares to move together" is false. Correlations can be positive, negative, or zero, and they indicate the strength and direction of the relationship between two variables. In the context of shares, positive correlations mean that the shares tend to move together, negative correlations mean that they tend to move in opposite directions, and zero correlations mean that they are unrelated. It is not correct to say that almost all correlations between shares are negative.

Question 8

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
$\begin{array}{lccccc}
\hline&\text { Expected }&\text {Standard }&\text {Correlation with }&\text {Correlation with }&\text {Correlation with }\
\text { Stock } & \text { Return } & \text { Deviation } & \text { Data\#3 } & \text { Metcash } & \text { Webjet } \
\hline \text { Data\#3 } & 14 \% & 6 \% & 1.0 & -1.0 & 0.0 \
\hline \text { Metcash } & 44 \% & 24 \% & -1.0 & 1.0 & 0.7 \
\hline \text { Webjet } & 23 \% & 14 \% & 0.0 & 0.7 & 1.0
\end{array}$
-The expected return of a portfolio that is equally invested in Data#3 and Metcash is closest to?

Accepted Answer

The expected return of a portfolio equally invested in two assets is the average of their expected returns. Thus, (14% + 44%) / 2 = 29%.

Question 9

A share market comprises 5000 shares of company A and 2000 shares of company B. Assume theshare prices for companies A and B are $20 and $35, respectively. If you have $15,000 to invest and you want to hold the market portfolio, how much of your money will you invest in company A?

Accepted Answer

To hold the market portfolio, you need to invest in the companies in proportion to their market capitalizations. Company A's market cap is 5,000 shares * $20 = $100,000, and Company B's market cap is 2,000 shares * $35 = $70,000. The total market cap is $100,000 + $70,000 = $170,000. The proportion of the market cap for Company A is $100,000 / $170,000 = 58.82%. Therefore, you should invest 58.82% of your $15,000 in Company A, which is $15,000 * 58.82% = $8,823.53.

Question 10

A share market comprises 1000 shares of company A and 3000 shares of company B. The share prices for companies A and B are $25 and $30, respectively. What is the capitalisation of the market portfolio?

Accepted Answer

The answer of A share market comprises 1000 shares of...

Question 11

A share market comprises 2000 shares of company A and 2000 shares of company B. The shar? prices for companies A and B are $20 and $10, respectively. What is the capitalisation of the market portfolio?

Accepted Answer

The market capitalization is calculated by multiplying the number of shares by the share price for each company and then summing the results: (2000 shares * $20) + (2000 shares * $10) = $40,000 + $20,000 = $60,000.

Question 12

You expect Wesfarmers (WES) to have a beta of 1 over the next year and the beta of Qantas (QAN) to be 1.2 over the next year. Also, you expect the volatility of WES to be 30% and that of QAN to be 40% over the next year. Which company has more systematic risk? Which company has more total risk?

Accepted Answer

The answer of You expect Wesfarmers (WES) to have a...

Question 13

The Capital Asset Pricing Model asserts that the return is equal to the risk-free rate plus a risk premium for systematic risk.

Accepted Answer

The Capital Asset Pricing Model (CAPM) calculates the expected return of an asset or portfolio based on its beta (systematic risk) relative to the market, multiplied by the market risk premium (difference between the expected return on the market and the risk-free rate). Therefore, the appropriate term to use in the context of CAPM is "expected" return rather than any of the other choices.

Question 14

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
$\begin{array}{lccccc}
\hline&\text { Expected }&\text {Standard }&\text {Correlation with }&\text {Correlation with }&\text {Correlation with }\
\text { Stock } & \text { Return } & \text { Deviation } & \text { Data\#3 } & \text { Metcash } & \text { Webjet } \
\hline \text { Data\#3 } & 14 \% & 6 \% & 1.0 & -1.0 & 0.0 \
\hline \text { Metcash } & 44 \% & 24 \% & -1.0 & 1.0 & 0.7 \
\hline \text { Webjet } & 23 \% & 14 \% & 0.0 & 0.7 & 1.0
\end{array}$
-The volatility of a portfolio that is equally invested in Webjet and Data#3 is closest to?

Accepted Answer

The portfolio volatility is calculated using the formula for two assets: $\sqrt{w_1^2 \sigma_1^2 + w_2^2 \sigma_2^2 + 2w_1w_2\sigma_1\sigma_2\rho_{12}}$. With equal weights (0.5 each), volatilities of 6% and 14%, and correlation of 0, the volatility is approximately 7.6%.

Question 15

A portfolio has 40% of its value in ASX shares and the rest in Woodside Petroleum (WPL). The volatilities of ASX and WPL are 40% and 30%, respectively, and the correlation between ASX and WPL is -0.3. What is the standard deviation of the portfolio?

Accepted Answer

The standard deviation of the portfolio is calculated using the formula: √(w1²σ1² + w2²σ2² + 2w1w2σ1σ2ρ), where w1 and w2 are the weights, σ1 and σ2 are the volatilities, and ρ is the correlation. Plugging in the values: √(0.4²*0.4² + 0.6²*0.3² + 2*0.4*0.6*0.4*0.3*(-0.3)) = 20.18%.

Question 16

Suppose you invest in 200 shares of CBA at $70 per share and 200 shares of WOW at $20 per share. If the price of CBA increases to $80 and the price of WOW decreases to $18 per share, what is the return on your portfolio?

Accepted Answer

First, let's calculate the total initial investment:

200 shares of CBA at $70 per share = 200 x 70 = $14,000
200 shares of WOW at $20 per share = 200 x 20 = $4,000
Total investment = $14,000 + $4,000 = $18,000

After the price changes, the value of the portfolio is:

200 shares of CBA at $80 per share = 200 x 80 = $16,000
200 shares of WOW at $18 per share = 200 x 18 = $3,600
Total value = $16,000 + $3,600 = $19,600

The return on the portfolio is:

(return on investment / initial investment) x 100%

= [(Total value - Total investment) / Total investment] x 100%

= [(19,600 - 18,000) / 18,000] x 100%

= 8.89%

Therefore, the return on the portfolio is 8.89%. The correct choice is B.

Question 17

Which of the following statements is FALSE?

Accepted Answer

The statement that the magnitude of a correlation is not easy to interpret is false. In fact, the magnitude of a correlation ranges from -1 to +1, with 0 indicating no correlation and values closer to -1 or +1 indicating stronger correlations.

Question 18

A portfolio comprises Cochlear (beta of 1.4) and Westpac (beta of 1.0). The amount invested in Cochlear is $10,000 and in Westpac is $20,000. What is the beta of the portfolio?

Accepted Answer

The portfolio beta is calculated as a weighted average of the individual betas. The weights are based on the proportion of the total investment. For Cochlear: $10,000/$30,000 = 0.3333 and for Westpac: $20,000/$30,000 = 0.6667. Portfolio beta = (0.3333 * 1.4) + (0.6667 * 1.0) = 1.1333, which rounds to 1.13.

Question 19

You observe that Telstra shares and the S&P/ASX 200 index have the following weekly returns: $$\begin{array} { c c c } 
\text { Week } & \text { Telstra return } & \text { S\&P/ASX 200 return } \
\hline 1 & 0.005 & 0.001 \
2 & 0.010 & 0.005 \
3 & - 0.003 & - 0.005 \
4 & - 0.005 & - 0.001
\end{array}$$ If this pattern of returns is typical of Telstra shares, and you calculated a beta against the S&P/ASX 200, which of the following is true?

Accepted Answer

Telstra's returns generally move in the same direction as the S&P/ASX 200 returns, indicating a positive beta.

Question 20

Which of the following statements is FALSE?

Accepted Answer

The variance of a portfolio also depends on the correlation between the individual shares. The higher the correlation, the lower the diversification benefits, hence the lower the reduction in portfolio variance.

Quiz 12: Systematic Risk and the Equity Risk Premium

CSL, a pharmaceutical company, has a beta of 1.1, and Woolworths has a beta of 1.0. The risk-freerate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in CSL and the balance in Woolworths?

Suppose you invest in 100 shares of BHP at $40 per share and 200 shares of ANZ at $25 per share. If the price of BHP increases to $50 and the price of ANZ decreases to $20 per share, what is the return on your portfolio?

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have betas.

Diversification reduces the risk of a portfolio because and some of the risks are averaged out of the portfolio.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A share market comprises 5000 shares of company A and 2000 shares of company B. Assume theshare prices for companies A and B are $20 and $35, respectively. If you have $15,000 to invest and you want to hold the market portfolio, how much of your money will you invest in company A?

A share market comprises 1000 shares of company A and 3000 shares of company B. The share prices for companies A and B are $25 and $30, respectively. What is the capitalisation of the market portfolio?

A share market comprises 2000 shares of company A and 2000 shares of company B. The shar? prices for companies A and B are $20 and $10, respectively. What is the capitalisation of the market portfolio?

You expect Wesfarmers (WES) to have a beta of 1 over the next year and the beta of Qantas (QAN) to be 1.2 over the next year. Also, you expect the volatility of WES to be 30% and that of QAN to be 40% over the next year. Which company has more systematic risk? Which company has more total risk?

The Capital Asset Pricing Model asserts that the return is equal to the risk-free rate plus a risk premium for systematic risk.

A portfolio has 40% of its value in ASX shares and the rest in Woodside Petroleum (WPL) . The volatilities of ASX and WPL are 40% and 30%, respectively, and the correlation between ASX and WPL is -0.3. What is the standard deviation of the portfolio?

Suppose you invest in 200 shares of CBA at $70 per share and 200 shares of WOW at $20 per share. If the price of CBA increases to $80 and the price of WOW decreases to $18 per share, what is the return on your portfolio?

Which of the following statements is FALSE?

A portfolio comprises Cochlear (beta of 1.4) and Westpac (beta of 1.0) . The amount invested in Cochlear is $10,000 and in Westpac is $20,000. What is the beta of the portfolio?

Which of the following statements is FALSE?