Quantitative Methods MCQ - Quantitative Methods Section 2

46 The covariance matrix for a portfolio is given below.

Security	A	B
A	480	140
B	140	600

The correlation for the portfolio is closest to:

Standard Deviation of A = √480= 21.91 Standard Deviation of B = √600 = 24.49 Corelation = 0.26

47 A portfolio manager had invested a total amount of $300,000 in stocks and fixed income instruments at the start of the year. Equity investments represented 60% of the portfolio and generated year-end return of 35%, whereas the fixed income instruments yielded 15%. The correlation of stock returns with fixed income instruments’ returns was found to be 20%. Based on the given data, the portfolio return would be closest to:

The total portfolio return is calculated as the weighted average return of the portfolio constituents. Portfolio return = (0.6 * 0.35) + (0.4 * 0.15) = 0.27 = 27.0%

48 The table below shows information on two portfolios:

	Fund A	Fund B
Portfolio weights (%)	45	55
Expected returns (%)	14	18
Standard deviations (%)	25	32
Correlation between the returns of Fund A and Fund B	0.85

The portfolio standard deviation of returns is closet to:

Calculate the portfolio standard deviation of returns as follows:
Simply Easy Learning

49 The table below shows weighting and returns of different asset classes comprising a portfolio:

Asset class	Asset allocation (weight) (%)	Asset class return (%)	Correlation with equities class (%)
Equities	65	22	100
Bonds	30	8	30
Cash and equivalents	5	1	25

Based on the data given in the table, the portfolio return is closest
to:

The portfolio return is the weighted mean return and is calculated as:0.65 * 22 + 0.30 * 8 + 0.05 * 1 = 16.75.

50 Arvind Roy currently has two stocks in his portfolio. 30% is invested in Gala Cement and the remainder is invested in Aqua Fertilizer. The two stocks have been performing quite well over the years with expected returns and standard deviations as follows:

Company	Expected Return	Standard Deviation
Gala Cement	10%	8%
Aqua Fertilizer	17%	20%

The covariance between these two stocks is 0.005. Arvind is considering adding another stock, Teragon Foods. Teragon Foods has a correlation coefficient of 0.4 with the current portfolio. Which of the following statements is least accurate?

Systematic risk cannot be reduced.