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Corporate Finance · End Term · 13 Apr 2025 · January 2025 term

Question 31: Security A has an expected return of 14% and a standard …

Question 31

+4 marksOne or more correct options

Security A has an expected return of 14% and a standard deviation of 20%. Security B has an expected return of 18% and a standard deviation of 25%. Suppose that the rates of return of the two securities have a correlation coefficient of 0.8. Based on the given information select the correct statements from below.

Select all that apply.

  1. A

    The covariance of security A and security B is 4%.

  2. B

    If an investor invests half of his wealth in security A and remaining half wealth in security B, then his portfolio’s expected return is 16%.

  3. C

    If an investor invests half of his wealth in security A and remaining half wealth in security B, then his portfolio’s standard deviation is 21.36%.

  4. D

    If an investor wants to build a portfolio with expected rate of return 15%, then he should invest 25% of wealth in security A and remaining 75% wealth in security B.

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Correct answers

  • A

    The covariance of security A and security B is 4%.

  • B

    If an investor invests half of his wealth in security A and remaining half wealth in security B, then his portfolio’s expected return is 16%.

  • C

    If an investor invests half of his wealth in security A and remaining half wealth in security B, then his portfolio’s standard deviation is 21.36%.

  • D

    If an investor wants to build a portfolio with expected rate of return 15%, then he should invest 25% of wealth in security A and remaining 75% wealth in security B.

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Question 31 of 35 in the IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 13 Apr 2025, in the January 2025 term (IIT M IMPROVEMENT AN EXAM QIM3 13 Apr 2025). It carries 4 marks.

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