FIN315 Suffolk University Principles of Finance Questions

Business Finance

Q1-3 Short answer

Q4-6 Short question

Q7 Long question

  • What is the non-arbitrage principle?
  • Explain why might it be a good idea to invest in assets that covariates negatively?
  • Explain what the problem with the covariance as a measure of relation is and what is the measure that corrects this problem.
  • You have two assets with standard deviation of returns, 2% and 3%, respectively for assets 1 and 2. If you invest 30% in asset one and the covariance between them is 0.5, what is the standard deviation of this portfolio?
  • If the weights on your portfolio composed of three assets are 20%, 30% and 50% and the expected return on the same assets are 4%, 6% and 7.5%. what is the expected return on the portfolio?
  • Compute the correlation between assets A and B IF YOU KNOW THAT THE STANDARD DEVIATION OF B is 50% of the standard deviation of A and the covariance between the two assets is 0.5 times the variance of asset A.
  • You have three assets A,B and C. The expected returns on those assets are 5%, 8% and 12%. The standard deviations are 2%, 4% and 10%. Your decide to invest 20%,45% and 35% in assets A,B,C, respectively.
  • What is the expected return on the portfolio?
  • What is the variance on the portfolio if the covariance among all the assets are zero?
  • An analyst tells you that the covariances were not well computed. Those are not all zero. The information he provides you is that the correlation between assets A and B is 0.5. all the other correlations are zero, as before, what is the new variance on the portfolio if you use this information?
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