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In this exercise you are choosing between the following investment strategies: Invest $200 in stock A. Stock...

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Basic Math

In this exercise you are choosing between the followinginvestment strategies:

Invest $200 in stock A. Stock A costs $20 per share. Expectedyield per share of stock A is $2, and the variance of yield pershare is 9 ($-squared).

Invest $200 in stock B. Stock B costs $10 per share. Expectedyield per share of stock B is $0.90, and the variance of yield pershare is 1 ($-squared).

Invest $100 in stock A and $100 in stock B. The correlationbetween yield per share of stock A and yield per share of stock Bis 0.12.

1)With strategy (iii), how many shares of stock A and stock B doyou buy?

a) 10 shares of A and 20 shares of B

b) 5 shares of A and 10 shares of B

c)10 of each

d) 20 of each

2)What is the value of the covariance between the yield on ashare of stock A and the yield on a share of stock B?

a) 0.16

b)0.12

c) 1.08

d) 0.36

3) When will portfolio (iii) lose money?

a) When the yield on portfolio (iii) is less than the expectedyield on portfolio (iii)

b) When the yield on portfolio (iii) is negative

c) When the yield on stock A is negative and the yield on stockB is negative

d)When the yield on stock A is negative or the yield on stock Bis negative

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