Risk Measurements

Question 1

Standard deviation measure of what

Answer 1

volatility

amount of variation or dispersion from an average

Total risk

Question 2

The standard deviation of a random variable is

Answer 2

the square root of its variance

Question 3

Standard deviation is used in what

Answer 3

capital allocation line, sharpe, Squared, and information ratio

Question 4

Steps in calculating SDEV

Answer 4

calculate the arithmetic mean rate of return

Subtract the mean rate of return from each years returns

Square the differences

Add the squares of the differences and find the arithmetic average of the sums = variances

Take the square root of variance = standard deviation

Question 5

N versus N-1

Answer 5

Population = N

Sample = N-1

Question 6

Investor allocates 40 percent of his portfolio to Stock A, with an expected rate of return of 0.18 and a variance of 0.0484 and 60 percent in a T bill that pays 4 percent. His portfolio’s expected return and standard deviation are
__________ and __________,

Answer 6

9.6%

8.8%

Question 7

Investor allocates 40 percent of his portfolio to Stock A, with an expected rate of return of 0.18 and a variance of 0.0484 and 60 percent in Stock B with an expected rate of return of 0.12 and a variance of 0.03. The correlation coefficient between Stocks A & B = 0.72. His portfolio’s expected return and standard deviation are __________ and __________,

Answer 7

14.40%

17.6%

Question 8

Investor allocates “some” percentage of his wealth in a risky asset with an expected rate of return of 12% and a variance of 4%, and “some” percentage in T bills that pay 5%. What percentages of his money must be invested in the risk free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.12?

Answer 8

60%

Question 9

The monthly standard deviation of a portfolio has been calculated to be 2.17.

Convert this monthly standard deviation to annualized standard deviation.

Answer 9

7.5171

Question 10

Variance measure

Answer 10

how far things are spread out

Question 11

Variance value of zero means

Answer 11

that all values with the set are identical

Question 12

Drawback of variance

Answer 12

gives added weight to outliers since squaring the numbers can skew interpretations

Question 13

Steps for calculating variance

Answer 13

Calculate the arithmetic mean rate of returns

Subtract the mean rate of return from each years returns

Square the differences

Add the squares of the differences and find the arithmetic averages of the sums = variance

Question 14

Covariance measures

Answer 14

how much two random variables move or change together

Question 15

High covariances implies

Answer 15

not much diversification

Question 16

Compute risk

Answer 16

Determine expected return for a portfolio, measured by SDEV

Calculate the correlation coefficient of expected returns between each pair of asset classes

Question 17

Beta is used in what

Answer 17

CAPM

Question 18

Beta is calculated by using

Answer 18

regression analysis

Question 19

Consider the following:

State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%

Return of stock B: 8%, 7%, 6%, 9%, 8%

What is the expected rates of returns of stock A and B?

Answer 19

13.2%

7.7%

Question 20

Consider the following:

State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%

Return of stock B: 8%, 7%, 6%, 9%, 8%

The standard deviations of stock A and B?

Answer 20

1.5%

1.1%

Question 21

Consider the following:

State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%

Return of stock B: 8%, 7%, 6%, 9%, 8%

The variances of stocks A and B are?

Answer 21

2.2%

1.2%

Question 22

Consider the following:

State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%

Return of stock B: 8%, 7%, 6%, 9%, 8%

The coefficient of correlation between A and B?

Answer 22

.46

Question 23

Consider the following:

State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%

Return of stock B: 8%, 7%, 6%, 9%, 8%

If you invested 40% of your money in A and 60% in B, what would be your expected rate of return and standard deviation?

Answer 23

9.9%

1.1%