Bodie Kane Marcus Investments 10th Edition Quiz 2 Online Chapters 6 & 7 Download The Quiz And Save As A Word Document On Your Computer. Please Type Alt Res

Download the quiz and save as a Word document on your computer. Please type alt responses to questions requiring short answers. Problems requiring calculations or diagrams can be hand written or typed and you must show your work to receive credit (correct answers without commensurate work will be marked as wrong). Answers to the problems are to be shown below the respective question, so you will have to insert sufficient space within the Word document.

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All questions worth 5 points each except for question 3, which is worth 15 pts.

1.    (5 pts) What is the key difference between speculation and gambling?

2.    (5 pts) You play a game where if the flip of a fair coin results in heads, you get $1,000 but get nothing if it comes up tails. What is the expected value of the game? You’re offered a choice —receive $400 and not play the game or play the game and live with the outcome. If you’re risk neutral, do you take the $400 or do you play the game? Why? If you’re risk averse, what is the amount (specify a range) someone would have to pay you to NOT play the game? If you’re risk seeking, what is the amount (specify a range) someone would have to pay you to NOT play the game?

3.    (15 pts) Use the following information for question 3: You manage a risky fund with expected return of 18% and standard deviation of 28%. The T-Bill rate is 8%. (You much show your work in the calculations to receive credit).

a.       Your client invests 70% in your risky fund and 30% in T-Bills. What is the expected return and standard deviation your client’s portfolio?

b.       Suppose your risky portfolio includes the following stocks: Stock A: 25%; Stock B: 32%; Stock C: 43%. What are the investment proportions of your client’s portfolio including the position in T-Bills?

c.       What is the Sharpe Ratio of your risky fund? What is the Sharpe ratio of your client’s portfolio?

d.       Draw the CAL of your risky fund on the expected return vs. standard deviation diagram and show the position of your client’s portfolio on the graph. What is the slope of the CAL? (Don’t worry about precision of the data points.)

e.       As you learn more about your client’s investment behavior, you estimate that her degree of risk aversion is A = 3.5. What proportion of your client’s portfolio should now be invested in your risky fund and how much in T-Bills. What is the expected return and risk of this portfolio?

Use the graph below to answer questions 4 & 5. The indifference curves shown all have the same risk aversion coefficient (A).

Expected Risk

4.          (5 pts) Rank the indifference curves (1, 2. 3, & 4) in order of highest to lowest Utility. Which curve represents the greatest utility that can be achieved by the investor? Which point represents the optimal complete portfolio?

5.          (5 pts) According to the graph, portfolio E has a higher expected return than portfolio F. Is E preferable to F based on the investor’s utility function? Why or why not?

Use the following table to answer question 6:

6. (5 pts) Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Why?

7. (5 pts) Portfolio theory as described by Markowitz is mostly concerned with:

a.    The elimination of systematic risk

b.    The effect of diversification on portfolio risk.

c.    The identification of unsystematic risk.

d.    Using active portfolio management to enhance returns.

8. (5 pts) Select the best response. Assume that an investor currently holding stock in Miller Corporation wants to add the stock of either Mac Corporation or Green Corporation to her portfolio.

All three stocks have the same expected return and volatility. The correlation between Miller and Mac is -0.05; and between Miller and Green is +0.05. Portfolio risk is expected to:

a.      Decline more when the investor buys Mac

b.      Decline more when the investor buys Green

c.      Increase when either Mac or Green is bought

d.      May decline or increase depending on other factors

Defend your answer.

9. (5 pts) Stocks A, B & C have the same expected return and standard deviation. The correlations between the returns of these stocks are shown in the table below.

Given these correlations, the portfolio constructed from these stocks having the lowest risk is a portfolio:

a.         Equally invested in stocks A & B

b.         Equally invested in stocks A & C

c.         Equally invested in stocks B & C

d.         Totally invested in stock C

Defend your answer.

10. (5 pts) George has a $2 million diversified portfolio invested in domestic large and small cap stocks and short term investment grade bonds. The expected return of this portfolio is 13.8% with an expected volatility of 23.1 %. George expects to receive an additional $2 million and wants to invest the new money in an index fund that best complements his current portfolio. He hires you to evaluate the four index funds shown in the table below for their ability to meet two criteria relative to George’s current portfolio: 1) maintain or enhance the expected return; and 2) maintain or reduce the expected volatility. Each index fund below is invested in asset classes that are not substantially represented by George’s current portfolio.

State which fund you would recommend to George and justify your choice by describing how your chosen fund best meets both of George’s criteria. No calculations are required.

11. (5 pts) Statistics for three stocks A, B & C are shown in the following tables:

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