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One of the major risks in the economy is the oil price Many financial assets are severely affected by the oil price Consider a natural gas company and an automobile compan
Question 1 --/1 One of the major risks in the economy is the oil price. Many financial assets are severely affected by the oil price. Consider a natural gas company and an automobile company. The natural gas company will be hit by a low oil price because the demand for natural gas will decrease as oil becomes cheaper. But the automobile company will benefit from a low oil price as more people can afford the cost of driving a car. The probability of the oil price next year is given by the following table: Oil price Probability drops 25% does not change 50% arises 25% Contingent on the change in the oil price next year, the annual returns to the companies are expected as follows: If oil price Natural gas Automobile drops -8% 18% does not change 6% 4% arises 12% -10% You are planning to invest 60% of your investment in the natural gas company and the remaining in the automobile company. What is the variance of your portfolio? 16.08 © 3.00 * 1.52 @ 5.88 © 10.32 Question 2 --/1 The Graduate Management Admission Test (GMAT) has four sections: analytical writing, integrated reasoning, quantitative and verbal sections. Suppose that a researcher collected GMAT score data and calculated the covariance matrix across sections. Analytical Writing Integrated Reasoning Quantitative Verbal Analytical Writing 0.81 Integrated Reasoning 0.648 1.44 Quantitative 0.72 1.92 16 Verbal 0.27 1.08 6 9 Find the pair of two sections that have the largest correlation coefficient. 1 Analytical writing and quantitative (2) Quantitative and verbal (3) Analytical writing and verbal (4) Integrated reasoning and quantitative Analytical writing and integrated reasoning
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