Scribd
Upload
199 views4 pages

Tutorial 4 - Introduction To Portfolio Management

This tutorial provides an introduction to key concepts in portfolio management including: 1) Diversification reduces risk by combining assets with imperfect positive covariances. 2) Covariance measures how returns on two assets move together, and is important for portfolio theory. 3) Investors choose optimal portfolios on the efficient frontier based on their utility for return and risk.

Uploaded by

One Ashley
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
199 views4 pages

Tutorial 4 - Introduction To Portfolio Management

This tutorial provides an introduction to key concepts in portfolio management including: 1) Diversification reduces risk by combining assets with imperfect positive covariances. 2) Covariance measures how returns on two assets move together, and is important for portfolio theory. 3) Investors choose optimal portfolios on the efficient frontier based on their utility for return and risk.

Uploaded by

One Ashley
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

Tutorial: Introduction to Portfolio Management

1. Why do most investors hold diversified portfolios?

2. What is covariance, and why is it important in portfolio theory?

3. Why do most assets of the same type show positive covariances of returns with
each other? Would you expect positive covariances of returns between different
types of assets such as returns on Treasury bills, General Electric common stock,
and commercial real estate? Why or why not?

4. What is the relationship between covariance and the correlation coefficient?

5. Explain the shape of the efficient frontier.

6. Why are investors’ utility curves important in portfolio theory?

7. Explain how a given investor chooses an optimal portfolio. Will this choice
always be a diversified portfolio, or could it be a single asset? Explain your
answer.

8. Assume that you and a business associate develop an efficient frontier for a set of
investments. Why might the two of you select different portfolios on the frontier?

9. Stocks K, L, and M each has the same expected return and standard deviation.
The correlation coefficients between each pair of these stocks are:
K and L correlation coefficient = +0.8
K and M correlation coefficient = +0.2
L and M correlation coefficient = −0.4
Given these correlations, a portfolio constructed of which pair of stocks will have
the lowest standard deviation? Explain.
10. A three-asset portfolio has the following characteristics.
Asset Expected Return Expected Standard Deviation Weight
X 0.15 0.22 0.50
Y 0.10 0.08 0.40
Z 0.06 0.03 0.10
What is the expected return on this three asset portfolio?

11. An investor is considering adding another investment to a portfolio. To achieve


the maximum diversification benefits, the investor should add, if possible, an
investment that has which of the following correlation coefficients with the other
investments in the portfolio?
a. −1.0
b. −0.5
c. 0.0
d. +1.0

12. Considering the world economic outlook for the coming year and estimates of
sales and earnings for the pharmaceutical industry, you expect the rate of return
for Lauren Labs common stock to range between −20 percent and +40 percent
with the following probabilities.
Probability Possible Returns
0.10 −0.20
0.15 −0.05
0.20 0.10
0.25 0.15
0.20 0.20
0.10 0.40
Compute the expected rate of return E(Ri) for Lauren Labs.
13. Given the following market values of stocks in your portfolio and their expected
rates of return, what is the expected rate of return for your common stock
portfolio?
Stock Market Value ($ Mil.) E(Ri )
Disney $15,000 0.14
Starbucks 17,000 −0.04
Harley Davidson 32,000 0.18
Intel 23,000 0.16
Walgreens 7,000 0.12

14. The following are the monthly rates of return for Madison Cookies and for Sophie
Electric during a six-month period.
Month Madison Cookies Sophie Electric
1 −0.04 0.07
2 0.06 −0.02
3 −0.07 −0.10
4 0.12 0.15
5 −0.02 −0.06
6 0.05 0.02
Compute the following.
a. Average monthly rate of return for each stock
b. Standard deviation of returns for each stock
c. Covariance between the rates of return
d. The correlation coefficient between the rates of return
e. Would these two stocks be good choices for diversification? Why or why not?
15. The following are monthly percentage price changes for four market indexes.
Month DJIA S&P 500 Russell 2000 Nikkei
1 0.03 0.02 0.04 0.04
2 0.07 0.06 0.10 −0.02
3 −0.02 −0.01 −0.04 0.07
4 0.01 0.03 0.03 0.02
5 0.05 0.04 0.11 0.02
6 −0.06 −0.04 −0.08 0.06
Compute the following.
a. Average monthly rate of return for each index
b. Standard deviation for each index
c. Covariance between the rates of return for the following indexes:
DJIA– S&P 500
S&P 500 – Russell 2000
S&P 500 – Nikkei
Russell 2000 – Nikkei
d. The correlation coefficients for the same four combinations
e. Using the answers from parts (a), (b), and (d), calculate the expected return and
standard deviation of a portfolio consisting of equal parts of (1) the S&P and the
Russell 2000 and (2) the S&P and the Nikkei. Discuss the two portfolios.

17. The standard deviation of Shamrock Corp. stock is 19 percent. The standard
deviation of Cara Co. stock is 14 percent. The covariance between these two
stocks is 10. What is the correlation between Shamrock and Cara stock?

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy