资金和金融风险管理代考 Tutorial Exercise 1 – SOLUTIONS

Tutorial Exercise 1 - SOLUTIONS

Question 1  资金和金融风险管理代考

The expected return on the market is 12% and the risk-free rate is 7%. The standard deviation of the return on the market is 15%. One investor creates a portfolio on the efficient frontier with an expected return of 10%. Another creates a portfolio on the efficient frontier with an expected return of 20%. What is the standard deviation of the return on each of the two portfolios?

The standard deviation of returns corresponding to an expected return of 10% is 9%.
The standard deviation of returns corresponding to an expected return of 20% is 39%.

Question 2

A portfolio manager has maintained an actively managed portfolio with a beta of 0.2. During the last year, the risk-free rate was 5% and major equity indices performed very badly, providing returns of about −30%. The portfolio manager produced a return of −10% and claims that in the circumstances it was good. Discuss this claim. When the expected return on the market is −30% the expected return on a portfolio with a beta of 0.2 is 0.05 + 0.2 × (−0.30 − 0.05) = −0.02 or –2%. The actual return of –10% is worse than the expected return. The portfolio manager has achieved an alpha of –8%!

Question 3  资金和金融风险管理代考

What is the difference between systematic and nonsystematic risk? Which is more important to an equity investor? Which can lead to the bankruptcy of a corporation? Nonsystematic risk can be diversified; systematic risk cannot. Systematic risk is more important to an equity investor. Either type of risk can lead to the bankruptcy of a corporation.

Question 4

Outline the arguments leading to the conclusion that all investors should choose the same portfolio of risky investments. What are the key assumptions?

We assume that investors trade off mean return and standard deviation of return. For a given mean return, they want to minimize standard deviation of returns. All make the same estimates of means, standard deviations, and coefficients of correlation for returns on individual investments. Furthermore, they can borrow or lend at the risk-free rate. The result is that they all want to be on the “new efficient frontier” in Figure 1.4. They choose the same portfolio of risky investments combined with borrowing or lending at the risk-free rate.

Question 5  资金和金融风险管理代考

What is meant by risk aggregation and risk decomposition? Which requires an in-depth understanding of individual risks? Which requires a detailed knowledge of the correlations  between risks?
Risk decomposition refers to a procedure where risks are handled one by one. Risk aggregation refers to a procedure where a portfolio of risks is considered. Risk decomposition requires an in-depth understanding of individual risks. Risk aggregation requires an understanding of the correlations between risks.

Question 6

The expected return on the market portfolio is 12% and the risk-free rate is 6%. What is the expected return on an investment with a beta of:
(a) 0.2?
(b) 0.5?
(c) 1.4?
(a) 7.2%, (b) 9%, (c) 14.4%

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