Question

1. Stock prices and stand-alone risk The S&P 500 Index is one of the most commonly used benchmark indices for the U.S. equity markets. Consisting of 500 companies, it is a market value-weighted index. This means that each company's performance is reflected in the index, weighted by the ratio of the company's value to the total value of all the companies. Based on your understanding of P/E ratios, in which of the following situations would the average trailing P/E ratio (current price divided by earnings per share over the previous 12 months) of the S&P 500 Index be higher? O Forecast earnings for S&P 500 companies are expected to fall in the future. O Forecast earnings for S&P 500 companies are expected to rise in the future. You invest $100,000 in 40 stocks, 20 bonds, and a certificate of deposit (CD). To which kind of risk will you primarily be exposed? O Portfolio risk O Stand-alone risk Generally, investors would prefer to invest in assets that have: O A higher-than-average expected rate of return given the perceived risk. O A lower-than-average expected rate of return given the perceived risk.

Answer 1

1.when the forecast earning for index will be higher, it will mean that the earning will be higher because trailing price to earning will reflect the sentiments of the investor

Correct answer will be option (B)forecast earning for index are expected to rise in future.

2.(A) portfolio risk, I have stirred into a large number of portfolio securities

3.(A) higher than average expected rate of return given the perceived risk, this is because the investor will always want a higher rate of return for their investment

4. Expected rate of return of Falcon fright=(50*35%+20*21%+25*-28%)=14.7%