Answered

\begin{tabular}{|l|l|l|l|}
\hline
\multicolumn{1}{|c|}{Investment} & Portfolio 1 & Portfolio 2 & Portfolio 3 \\
\hline
Stock in Large, Old Corporation & [tex]$\$[/tex] 500[tex]$ & $[/tex]\[tex]$ 2,000$[/tex] & [tex]$\$[/tex] 2,000[tex]$ \\
\hline
Stock in Emerging Company & $[/tex]\[tex]$ 5,000$[/tex] & [tex]$\$[/tex] 500[tex]$ & $[/tex]\[tex]$ 1,000$[/tex] \\
\hline
U.S. Treasury Bond & [tex]$\$[/tex] 3,000[tex]$ & $[/tex]\[tex]$ 500$[/tex] & [tex]$\$[/tex] 1,000[tex]$ \\
\hline
Certificate of Deposit & $[/tex]\[tex]$ 500$[/tex] & [tex]$\$[/tex] 6,000[tex]$ & $[/tex]\[tex]$ 3,000$[/tex] \\
\hline
\end{tabular}

Which of the following shows the portfolios' levels of risk from highest to lowest?

A. Portfolio 2, Portfolio 3, Portfolio 1
B. Portfolio 1, Portfolio 3, Portfolio 2
C. Portfolio 2, Portfolio 1, Portfolio 3
D. Portfolio 3, Portfolio 2, Portfolio 1



Answer :

GinnyAnswer
To determine the levels of risk for each portfolio, we need to consider both the investment amount and the risk weight of each asset class in the portfolios. Here's how the risk weights for the assets are distributed:

- Stock in Large, Old Corporation: Risk weight of 2.
- Stock in Emerging Company: Risk weight of 5.
- U.S. Treasury Bond: Risk weight of 1.
- Certificate of Deposit (CD): Risk weight of 3.

We will calculate the risk for each portfolio by multiplying the investment amounts by their respective risk weights and summing them up.

### Portfolio 1
[tex]\[ \begin{align*} \text{Stock in Large, Old Corporation} & : \$500 \times 2 = 1000 \\ \text{Stock in Emerging Company} & : \$5000 \times 5 = 25000 \\ \text{U.S. Treasury Bond} & : \$3000 \times 1 = 3000 \\ \text{Certificate of Deposit} & : \$500 \times 3 = 1500 \\ \end{align*} \][/tex]
Total Risk for Portfolio 1:
[tex]\[ 1000 + 25000 + 3000 + 1500 = 30500 \][/tex]

### Portfolio 2
[tex]\[ \begin{align*} \text{Stock in Large, Old Corporation} & : \$2000 \times 2 = 4000 \\ \text{Stock in Emerging Company} & : \$500 \times 5 = 2500 \\ \text{U.S. Treasury Bond} & : \$500 \times 1 = 500 \\ \text{Certificate of Deposit} & : \$6000 \times 3 = 18000 \\ \end{align*} \][/tex]
Total Risk for Portfolio 2:
[tex]\[ 4000 + 2500 + 500 + 18000 = 25000 \][/tex]

### Portfolio 3
[tex]\[ \begin{align*} \text{Stock in Large, Old Corporation} & : \$2000 \times 2 = 4000 \\ \text{Stock in Emerging Company} & : \$1000 \times 5 = 5000 \\ \text{U.S. Treasury Bond} & : \$1000 \times 1 = 1000 \\ \text{Certificate of Deposit} & : \$3000 \times 3 = 9000 \\ \end{align*} \][/tex]
Total Risk for Portfolio 3:
[tex]\[ 4000 + 5000 + 1000 + 9000 = 19000 \][/tex]

### Comparing the Risks
From the calculations above, the total risks are:
- Portfolio 1: 30500
- Portfolio 2: 25000
- Portfolio 3: 19000

Hence, the portfolios' levels of risk from highest to lowest are:
[tex]\[ \text{Portfolio 1}, \text{Portfolio 2}, \text{Portfolio 3} \][/tex]

Therefore, the correct answer is:
[tex]\[ \boxed{\text{Portfolio 1, Portfolio 2, Portfolio 3}} \][/tex]

Other Questions