Correlation and Diversification
Quiz 2
1.
Consider the returns of the MSCI indexes of developed and emerging markets equity in columns C and D of the Excel file that goes with this quiz. Given the returns over the 1988-2013 period, what has been the correlation between these markets?
0.79
0.67
0.44
0.91
0.23
2.
Consider the returns of the MSCI index of developed markets equity in column C of the Excel file that goes with this quiz. Given the returns over the 1988-2013 period, and the arithmetic mean return and volatility you calculated in the first quiz (which you could also recalculate now if necessary), what has been the ‘quick-and-dirty’ risk-adjusted return of these markets?
0.21
0.54
0.89
0.72
0.99
3.
Consider the returns of the MSCI index of emerging markets equity in column D of the Excel file that goes with this quiz. Given the returns over the 1988-2013 period, and the arithmetic mean return and volatility you calculated in the first quiz (which you could also recalculate now if necessary), what has been the ‘quick-and-dirty’ risk-adjusted return of these markets?
0.76
0.12
0.51
0.98
0.29
1
point
4.
Which one of the statements below is false?
The standard deviation of returns cannot be a negative number.
The geometric mean return can be a negative number.
The beta of an asset can be higher than 2.
The arithmetic mean return can be a negative number.
The correlation between two assets can only be a positive number.
1
point
5.
Which one of the statements below is true?
When two assets with a correlation lower than 1 are combined into a portfolio, the volatility of the portfolio is equal to the weighted-average volatility of the two assets.
The correlation between two assets can higher than 1.5
When two assets with a correlation lower than 1 are combined into a portfolio, the volatility of the portfolio is higher than the weighted-average volatility of the two assets.
The correlation between two assets can be lower than –1.5
When two assets with a correlation lower than 1 are combined into a portfolio, the volatility of the portfolio is lower than the weighted-average volatility of the two assets.
1
point
6.
Of the five options below, select the one that incorrectly completes the following sentence: “Diversification can help investors …
to increase risk-adjusted returns.”
to reduce risk.”
to reduce risk and increase returns at the same time.”
to always be fully exposed to the best performing asset.”
to increase returns.”
1
point
7.
Which one of the statements below is false?
In selected periods, frontier markets can be less volatile than developed markets.
Correlations are a critical variable to consider when building a portfolio.
In selected periods, frontier markets can be less volatile than emerging markets.
The volatility of a portfolio is always a non-negative number.
Spanish investors have nothing to gain from diversifying into a risky market like China.
1
point
8.
Which one of the statements below is true?
In the long term, the correlations across global equity markets tend to be positive.
The correlation between an equity market and the world equity market is always close to 1.
Arithmetic mean returns are always equal to geometric mean returns.
The volatility of an asset is typically equal to one half of the asset’s beta.
The correlation between an equity market and the world equity market is always close to 0.
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