Question 1

Suppose you invest $15,000 by purchasing 200 shares of Abbott Labs (ABT) at $40 per share, 200 shares of Lowes (LOW) at $20 per share, and 100 shares of Ball Corporation (BLL) at $30 per share. The weight of Ball Corporation in your portfolio is ________.

Accepted Answer

C) 11ea84dc_f530_d09f_9a63_03aac0d0dfdc_TB1316_00_TB1316_00 11ea84dc_f530_d0a0_9a63_1598fafc1cdb_TB1316_00_TB1316_00

Question 2

The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares of Apple increase to $56 after one year and to $66 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid.

Accepted Answer

B) Compute portfolio values at year 0, year 1, and year 2. Then calculate the annual returns from those portfolio values. 11ea84dc_f52f_bf1f_9a63_d5bc7e38c552_TB1316_00_TB1316_00 11ea84dc_f52f_bf20_9a63_97d69025c1b8_TB1316_00_TB1316_00 11ea84dc_f52f_bf21_9a63_c968fd12c3b8_TB1316_00_TB1316_00 11ea84dc_f52f_e632_9a63_7d8aff8963c9_TB1316_00_TB1316_00 11ea84dc_f52f_e633_9a63_25f264ba2dc8_TB1316_00_TB1316_00

Question 3

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Abbott Labs in your portfolio is ________.

Accepted Answer

A) 11ea84dc_f530_a98b_9a63_c9058e6982bf_TB1316_00_TB1316_00 11ea84dc_f530_a98c_9a63_df877e852fcf_TB1316_00_TB1316_00

Question 4

Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $118 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on AGG to be 6%, what is the expected return for your retirement portfolio?

Accepted Answer

A) To calculate the expected return on the portfolio, compute portfolio weights in SPY and AGG. Multiply weight of SPY by return on SPY and weight of AGG by return on AGG.
Alternatively, the expected return on the portfolio can be calculated as follows: 11ea84dc_f52e_fbc1_9a63_d59314009573_TB1316_00_TB1316_00 11ea84dc_f52e_fbc2_9a63_b3baa16e7f88_TB1316_00_TB1316_00 11ea84dc_f52e_fbc3_9a63_a79b15e5be40_TB1316_00_TB1316_00

Question 5

Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $136 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on AGG to be 10%, what is the expected return for your retirement portfolio?

Accepted Answer

C) To calculate the expected return on the portfolio, compute portfolio weights in SPY and AGG. Multiply weight of SPY by return on SPY and weight of AGG by return on AGG.
Alternatively, the expected return on the portfolio can be calculated as follows: 11ea84dc_f52f_22d4_9a63_311d63755e81_TB1316_00_TB1316_00 11ea84dc_f52f_22d5_9a63_1b969554c369_TB1316_00_TB1316_00 11ea84dc_f52f_22d6_9a63_7fe92e48e7e3_TB1316_00_TB1316_00

Question 6

A portfolio has three stocks - 300 shares of Yahoo (YHOO), 300Shares of General Motors (GM), and 80 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM.

Accepted Answer

C) Compute the value of each stock in the portfolio by multiplying stock price by number of shares of each. Compute total portfolio value by adding each component. Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weight for GM. 11ea84dc_f52e_3867_9a63_098582b138e2_TB1316_00_TB1316_00 weight of 11ea84dc_f52e_3868_9a63_5fbe679ac929_TB1316_11_TB1316_11

Question 7

The price of Microsoft is $37 per share and that of Apple is $43 per share. The price of Microsoft increases to $42 per share after one year and to $47 after two years. Also, shares of Apple increase to $49 after one year and to $59 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid.

Accepted Answer

C) Compute portfolio values at year 0, year 1, and year 2. Then calculate the annual returns from those portfolio values. 11ea84dc_f530_0d44_9a63_4bf0cf93bd09_TB1316_00_TB1316_00 11ea84dc_f530_0d45_9a63_53072c1c0f65_TB1316_00_TB1316_00 11ea84dc_f530_0d46_9a63_ffaa0cad83ef_TB1316_00_TB1316_00 11ea84dc_f530_3457_9a63_df6c2acdaebe_TB1316_00_TB1316_00 11ea84dc_f530_3458_9a63_c3606b8f2c76_TB1316_00_TB1316_00

Question 8

Which of the following equations is INCORRECT?

Accepted Answer

A) x_i = 11ea84dc_f530_827a_9a63_7715fa8fe0b6_TB1316_00_TB1316_00

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) Without trading, the portfolio weights will increase for the stocks in the portfolio whose returns are above the overall portfolio return.

Question 10

The price of Microsoft is $30 per share and that of Apple is $58 per share. The price of Microsoft increases to $39 per share after one year and to $42 after two years. Also, shares of Apple increase to $66 after one year and to $71 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid.

Accepted Answer

A) Compute portfolio values at year 0, year 1, and year 2. Then calculate the annual returns from those portfolio values. 11ea84dc_f52f_70fa_9a63_3fea081ddf26_TB1316_00_TB1316_00 11ea84dc_f52f_70fb_9a63_4939f1ec963c_TB1316_00_TB1316_00 11ea84dc_f52f_980c_9a63_572132be85fe_TB1316_00_TB1316_00 11ea84dc_f52f_980d_9a63_99c6f3b37490_TB1316_00_TB1316_00 11ea84dc_f52f_980e_9a63_679f37098dae_TB1316_00_TB1316_00

Question 11

Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230 shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50 and the price of Yahoo decreases to $20 per share, what is the return on your portfolio?

Accepted Answer

A) Compute value of HOG stock (stock price times number of shares) and the value of YHOO stock. Add values of both to compute portfolio value. Repeat with new price of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute return.
Initial portfolio value = 100 × $40 + 230 × $25 = $9750;
final portfolio value = 100 × $50 + 230 × $20 = $9600;
hence portfolio return = $9600 / $9750 - 1 = -1.54%.

Question 12

Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240 shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to $80 and the price of Yahoo decreases to $18 per share, what is the return on your portfolio?

Accepted Answer

B) Compute value of JNJ stock (stock price times number of shares) and the value of Yahoo stock. Add values of both to compute portfolio value. Repeat with new price of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute return. 11ea84dc_f52e_868b_9a63_b90002f0d591_TB1316_00_TB1316_00 11ea84dc_f52e_ad9c_9a63_b9f89d737856_TB1316_00_TB1316_00 11ea84dc_f52e_ad9d_9a63_b7a1b6034045_TB1316_00_TB1316_00

Question 13

Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $134 and that of AGG is $110. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 8%, what is the expected return for your retirement portfolio?

Accepted Answer

D) To calculate the expected return on the portfolio, compute portfolio weights in SPY and AGG. Multiply weight of SPY by return on SPY and weight of AGG by return on AGG.
Alternatively, the expected return on the portfolio can be calculated as follows: 11ea84dc_f52f_49e7_9a63_dd8cec405563_TB1316_00_TB1316_00 11ea84dc_f52f_49e8_9a63_558eb946fce1_TB1316_00_TB1316_00 11ea84dc_f52f_49e9_9a63_63656165a23e_TB1316_00_TB1316_00

Question 14

Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.

Accepted Answer

Both diversifiable risk and undiversifiable risk are factors that contribute to total risk, but only undiversifiable risk is rewarded with higher expected returns. Diversifiable risk can be eliminated by proper diversification, so rational investors will not demand higher returns for bearing this type of risk. In contrast, undiversifiable risk, also known as market risk, affects the entire market and cannot be diversified away. Therefore, investors expect to be compensated with higher returns for bearing this type of risk.

Question 15

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Lowes in your portfolio is ________.

Accepted Answer

D) 11ea84dc_f530_a98d_9a63_1d68ee8d6f07_TB1316_00_TB1316_00 11ea84dc_f530_d09e_9a63_bb832efd8c8c_TB1316_00_TB1316_00

Question 16

A portfolio comprises two stocks, A and B, with equal amounts of money invested in each. If stock A's stock price increases and that of stock B decreases, the weight of stock A in the portfolio will increase.

Accepted Answer

As the stock price of stock A increases, the total value of stock A in the portfolio will increase compared to the value of stock B. This will result in the weight of stock A in the portfolio increasing, and the weight of stock B decreasing.

Question 17

A portfolio has three stocks - 110 shares of Yahoo (YHOO), 210 Shares of General Motors (GM), and 70 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM.

Accepted Answer

D) Compute the value of each stock in the portfolio by multiplying stock price by number of shares of each. Compute total portfolio value by adding each component. Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weight for GM. 11ea84dc_f52e_5f79_9a63_596a9eeb907d_TB1316_00_TB1316_00 11ea84dc_f52e_5f7a_9a63_ffa08c4e692c_TB1316_00_TB1316_00

Question 18

A portfolio has three stocks - 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM.

Accepted Answer

A) Compute the value of each stock in the portfolio by multiplying stock price by number of shares of each. Compute total portfolio value by adding each component. Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weight for GM.
Thus, 11ea84dc_f52e_1155_9a63_73ccea44ac5b_TB1316_11_TB1316_11 weight of 11ea84dc_f52e_1156_9a63_9d6da4c0e65f_TB1316_11_TB1316_11

Question 19

Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your portfolio?

Accepted Answer

C) Compute value of MRK stock (stock price times number of shares) and the value of YHOO stock. Add values of both to compute portfolio value. Repeat with new price of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute return. 11ea84dc_f52e_ad9e_9a63_87d8516dec0a_TB1316_00_TB1316_00 11ea84dc_f52e_d4af_9a63_c560f062f643_TB1316_00_TB1316_00 11ea84dc_f52e_d4b0_9a63_a554f3332aa7_TB1316_00_TB1316_00

Question 20

The volatility of an individual stock is more than the volatility of a well-diversified portfolio of stocks.

Accepted Answer

The volatility of an individual stock is influenced by its own unique factors such as company performance, management decisions, and external market forces. A well-diversified portfolio of stocks, on the other hand, includes a range of stocks from different companies and industries, which tend to have lower overall volatility due to the diversification. Therefore, the statement is true that the volatility of an individual stock is more than the volatility of a well-diversified portfolio of stocks.

Quiz 12: Systematic Risk and the Equity Risk Premium