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1. Evaluate whether the following statements are true or false. a) Even if a risky security has a… 1 answer below » 1. Evaluate whether the following statements are true or false. a) Even if a risky security has a return lower than the risk-free rate, this security could be held for diversification purposes. b) The Glass-Steagall Act of 1933 separated commercial banking from investment banking. c) If returns on two stocks are perfectly positively correlated, you can build a riskless portfolio with those stocks when short-selling is not allowed. d) A risk-free security has a variance of zero. Document Preview: View complete question » 1. Evaluate whether the following statements are true or false. a) Even if a risky security has a return lower than the risk-free rate, this security could be held for diversification purposes. b) The Glass-Steagall Act of 1933 separated commercial banking from investment banking. c) If returns on two stocks are perfectly positively correlated, you can build a riskless portfolio with those stocks when short-selling is not allowed. d) A risk-free security has a variance of zero. Document Preview: 1. Evaluate whether the following statements are true or false.
Even if a risky security has a return lower than the risk-free rate, this security could be held for diversification purposes.
The Glass-Steagall Act of 1933 separated commercial banking from investment banking.
If returns on two stocks are perfectly positively correlated, you can build a riskless portfolio with those stocks when short-selling is not allowed.
A risk-free security has a variance of zero.
A security with a beta of zero is risk free.
The CAPM implies that investors demand high returns for holding securities with low betas.
If a stock lies above the securities market line, it is overvalued.
There is an overwhelming majority of evidence against market efficiency: if you find a profitable trading strategy, you immediately tell the world how to trade.
The small firm in January effect is strongest at the beginning of the month.
When a risk-free asset is available, the minimum variance portfolio is the optimal portfolio for all risk-averse investors.
2. Consider the following scenario analysis involving asset A and asset B:
Economic Condition Probability Return on X Return on Y Boom 0.1 30% 12% Accelerated Growth 0.2 20% 10% Normal Growth 0.4 15% 9% Slowdown 0.2 10% 8% Recession 0.1 -50% -4%
Compute the expected returns and the standard deviation of returns for both assets. Then compute the correlation coefficient between the returns on the two assets.
Find the expected return and the standard deviation of the minimum variance portfolio of A and B, when short-selling is allowed.
3. There are two risky assets and one risk-free asset available for investment. The two risky assets have the following features: Asset X has an expected return of 25% and a variance of returns of 625%2 (0.04). Asset Y has an expected return on 20% and a standard deviation of returns of 20%. The covariance between the returns on X and Y is 500%2 (0.0500). Short selling risky assets… Attachments: Q-Attachment.doc View less » Aug 01 2015 05:01 PM
