QUESTION 17 Questions 17 to 20 SchoolStreet most recently acquired an investment
ID: 3324824 • Letter: Q
Question
QUESTION 17
Questions 17 to 20
SchoolStreet most recently acquired an investment management firm UMB Advisor LLC. Caleb just met one of the research analysts, Andy Iverson at UMB. Andy was asked to conduct analysis on a number of healthcare stocks. After discussing his assignment with Caleb, Andy starts to analyze the risk and return parameters related to Obmcare, a small healthcare firm. After an in depth analysis of the firm and the economic outlook, Andy estimates the return probabilities and historical returns that are on the Exhibit 1 and 2 to quantify the risk/return relationship for Obmcare. During the four-year period, Obmcare’s expected return was 8.5 percent. Exhibit - 2 Period Return 2011 0.14 2010 -0.08 2009 -0.15 2008 0.32 Exhibit - 1 Probability Return 30% -0.05 50% 0.15 20% 0.25 Exhibit 3 HCA Health Corp. HMA Heath, Inc. Expected Return 11% 9% Standard Deviation 0.22 0.13 Portfolio Asset Allocation 65% 35% The correlation between HCA and HMA is 0.25. Later on Andy moves on to create a two-stock portfolio for one of the clients who wants healthcare industry exposure. Exhibit 3 lists the risk and return characteristics of two-stock, HCA Health Corp. and HMA Heath, Inc., portfolio. Andy’s final task for the assignment is to analyze two additional stocks, Delta Health and Canada Health The following data is available for the stocks: Exhibit 4 Standard Deviation suggested weighting 2011 Return 2010 Return 2009 Return Delta Health 12% 60% 12% 7% 1% Canada Health 17% 40% -22% 10% 9% Based on Exhibit 1 and Exhibit 2, Andy calculated the expected return and variance for Obmcare, respectively, are closest to:
A. Expected return and variance are 11.67% and 13.77%, respectively. B. Expected return and variance are 3.67% and 3.52%, respectively. C. Expected return and variance are 11.00% and 3.44%, respectively.
QUESTION 18 Based on Exhibit 1, Andy made the following statement regarding correlation of Obmcare with the market and the standard deviation. "The expected standard deviation of returns for Obmcare is closest to 11.83% and the correlation of Obmcare with the market is between 0.5 and 1." Is Andy correct with respect to his statement on standard deviation and correlation?
A. Andy is correct regarding standard deviation but not for correlation. B. Yes. C. No.
QUESTION 19 Andy calculated the correlation between Delta Heath and Canada Health is closest to:
A. -0.81 B. -0.27 C. -0.06 1
QUESTION 20 Based on Exhibit 3, Andy constructed a two stock, HCA Health and HMA, portfolio and calculated the expected return and standard deviation of the portfolio are closest to:
A. Expected return and standard deviation of the portfolio are 10.00% and16.05%, respectively. B. Expected return and standard deviation of the portfolio are 10.30% and15.54%, respectively. C. Expected return and standard deviation of the portfolio are 10.30% and16.05%, respectively.
Explanation / Answer
17 C. Expected return and variance are 11.00% and 3.44%, respectively.
18. B. Yes.
19. A. -0.81
20. B. Expected return and standard deviation of the portfolio are 10.30% and15.54%, respectively.