Question $110$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

Questions $1-10$ are designed to review some statistical concepts as well as to help you understand the benefits from diversification. Assume that there are two assets $($A and B$)$ and there are four possible future scenarios. The four scenarios and their probabilities are shown in the following table. The last two columns show the returns on assets A and B in the four possible scenarios.

Scenario

Probability

$$

$$

Boom

$0\mathrm{.}3$

$0\mathrm{.}15$

$-0\mathrm{.}02$

Normal

$0\mathrm{.}3$

$0\mathrm{.}08$

$-0\mathrm{.}01$

Recession

$0\mathrm{.}3$

$-0\mathrm{.}05$

$0\mathrm{.}03$

Disaster

$0\mathrm{.}1$

$-0\mathrm{.}20$

$0\mathrm{.}05$

What is the expected return on asset A$?$

Group of answer choices

$-0\mathrm{.}020$

$0\mathrm{.}024$

$0\mathrm{.}034$

$0\mathrm{.}051$

Flag question: Question $2$

Question $210$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

What is the expected return on asset B$?$

Group of answer choices

$-0\mathrm{.}011$

$0\mathrm{.}005$

$0\mathrm{.}009$

$0\mathrm{.}015$

Flag question: Question $3$

Question $310$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

What is the standard deviation of the return on A$?$

Group of answer choices

$0\mathrm{.}1107$

$0\mathrm{.}1321$

$0\mathrm{.}1425$

$0\mathrm{.}1652$

Flag question: Question $4$

Question $410$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

What is the standard deviation of the return on B$?$

Group of answer choices

$0\mathrm{.}0124$

$0\mathrm{.}0156$

$0\mathrm{.}0214$

$0\mathrm{.}0254$

Flag question: Question $5$

Question $510$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

What is the covariance between two asset returns?

Group of answer choices

$0\mathrm{.}00168$

$-0\mathrm{.}00168$

$0\mathrm{.}00276$

$-0\mathrm{.}00276$

Flag question: Question $6$

Question $610$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

What is the correlation between two asset returns?

Group of answer choices

$-0\mathrm{.}85$

$-0\mathrm{.}98$

$0\mathrm{.}43$

$0\mathrm{.}76$

Flag question: Question $7$

Question $710$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

Now, suppose that you construct a portfolio with asset A $(20\%)$ and asset B $(80\%).$ What is the expected return on this portfolio?

Group of answer choices

$0\mathrm{.}0052$

$0\mathrm{.}0108$

$0\mathrm{.}0195$

$0\mathrm{.}0321$

Flag question: Question $8$

Question $810$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

What is the standard deviation of the portfolio return?

Group of answer choices

$0\mathrm{.}0045$

$0\mathrm{.}0085$

$0\mathrm{.}0001$

$0\mathrm{.}0120$

Flag question: Question $9$

Question $910$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

Suppose that Mike has been holding asset B$.($That is$,$ Mike is holding a portfolio that entirely consists of asset B$).$ Today, a stockbroker came to Mike and recommended that he add a little bit of asset A into his portfolio $($for example, $80\%$ of asset B and $20\%$ of asset A$).$ Mike rejected this suggestion because he thinks that it is not a good idea to add a riskier asset into his portfolio $--$ based on the answers for Q$3$ and Q$4,$ he knows that asset A is riskier $($than asset B$)$ in the sense that it has a higher standard deviation. Do you think that rejecting the stock broker$$s suggestion was a correct decision?

Group of answer choices

Yes

No

Flag question: Question $10$

Question $1010$ pts

$[$Question $(1)-(10)$ are sharing the same information$]$

Systematic risk refers to the part of the total risk of an investment that can be diversified away.

Group of answer choices

True

False

Flag question: Question $11$

Question $1110$ pts

You expect General Motors $($GM$)$ to have a beta of $1\mathrm{.}5$ over the next year, and the beta of Exxon Mobil $($XOM$)$ to be $1$ over the next year. Also, you expect the volatility $($i$.$e$.$ the standard deviation of returns$)$ of GM to be $40\%,$ and that of XOM to be $60\%$ over the next year. Which stock has more systematic risk? Which stock has more total risk?

Group of answer choices

GM$,$ XOM

XOM, GM

GM$,$ GM

XOM, XOM

Flag question: Question $12$

Question $1210$ pts

Shell$$s stock price jumped when it announced that it discovered a large oil field in the Gulf of Mexico. This is an example of $.$

Group of answer choices

Market risk

Unsystematic risk

Systematic risk

Undiversifiable risk

Flag question: Question $13$

Question $1310$ pts

Your estimate of the market risk premium is $9\%.$ The risk$-$free rate of return is $4\%$ and General Electric has a beta of $0\mathrm{.}7.$ According to the CAPM, what is its expected return?

Group of answer choices

$8\mathrm{.}4\%$

$7\mathrm{.}5\%$

$12\mathrm{.}1\%$

$10\mathrm{.}3\%$

Flag question: Question $14$

Question $1410$ pts

Assume CAPM is true. Also assume that when the stock market rises by $2\%,$ we expect Apple to rise by $5\%.$ If the market fell $3\%$ today, what is the expected Apple performance?

Group of answer choices

$-9\%$

$-3\%$

$-7\mathrm{.}5\%$

$5\%$

Flag question: Question $15$

Question $1510$ pts

Companies that sell household products and food have very little relation to the state of the entire economy because these basic needs always exist. These stocks tend to have betas.

Group of answer choices

High

Low

Negative

Infinite