Question 1

Which of the following formulas is INCORRECT?

Accepted Answer

A) Variance of an Equally Weighted Portfolio = (1 -   )(Average Variance of Individual Stocks)+   (Average Covariance Between the Stocks) 
B) Variance of a portfolio =         Cov(   ,   ) 
C) Variance of a portfolio =     Cov(   ,   ) 
D) Variance of a portfolio =     Cov(   ,       ) 
A) Variance of an Equally Weighted Portfolio = (1 -   )(Average Variance of Individual Stocks)+   (Average Covariance Between the Stocks) 
B) Variance of a portfolio =         Cov(   ,   ) 
C) Variance of a portfolio =     Cov(   ,   ) 
D) Variance of a portfolio =     Cov(   ,       ) A

Question 2

Use the information for the question(s)below.
Tom's portfolio consists solely of an investment in Merck stock.Merck has an expected return of 13% and a volatility of 25%.The market portfolio has an expected return of 12% and a volatility of 18%.The risk-free rate is 4%.Assume that the CAPM assumptions hold in the market.
-Assuming that Tom wants to maintain the current expected return on his portfolio,then the minimum volatility that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:

Accepted Answer

A) 20%. 
B) 25%. 
C) 22%. 
D) 18%. 
A) 20%. 
B) 25%. 
C) 22%. 
D) 18%. A

Question 3

The beta for the risk-free investment is closest to:

Accepted Answer

A) 1. 
B) 0. 
C) Unable to answer this question without knowing the risk-free rate. 
D) Unable to answer this question without knowing the market's volatility. 
A) 1. 
B) 0. 
C) Unable to answer this question without knowing the risk-free rate. 
D) Unable to answer this question without knowing the market's volatility. B

Question 4

Use the information for the question(s)below.
Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Monsters Inc.has a 24% volatility and a correlation with the market of .60,while California Gold Mining has a 32% volatility and a correlation with the market of -.7.Assume the CAPM assumptions hold.
-Monsters' beta with the market is closest to:

Accepted Answer

A) 1.3. 
B) 1.0. 
C) 0.6. 
D) 0.8. 
A) 1.3. 
B) 1.0. 
C) 0.6. 
D) 0.8.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) The expected return of a portfolio is equal to the weighted average expected return,but the volatility of a portfolio is less than the weighted average volatility. 
B) Each security contributes to the volatility of the portfolio according to its volatility,scaled by its covariance with the portfolio,which adjusts for the fraction of the total risk that is common to the portfolio. 
C) Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification. 
D) The overall variability of the portfolio depends on the total co-movement of the stocks within it. 
A) The expected return of a portfolio is equal to the weighted average expected return,but the volatility of a portfolio is less than the weighted average volatility. 
B) Each security contributes to the volatility of the portfolio according to its volatility,scaled by its covariance with the portfolio,which adjusts for the fraction of the total risk that is common to the portfolio. 
C) Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification. 
D) The overall variability of the portfolio depends on the total co-movement of the stocks within it.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) A short sale is a transaction in which you buy a stock that you do not own and then agree to sell that stock back in the future. 
B) The efficient portfolios are those portfolios offering the lowest possible level of volatility for a given level of expected return. 
C) A positive investment in a security can be referred to as a long position in the security. 
D) It is possible to invest a negative amount in a stock or security,which is called a negative position. 
A) A short sale is a transaction in which you buy a stock that you do not own and then agree to sell that stock back in the future. 
B) The efficient portfolios are those portfolios offering the lowest possible level of volatility for a given level of expected return. 
C) A positive investment in a security can be referred to as a long position in the security. 
D) It is possible to invest a negative amount in a stock or security,which is called a negative position.

Question 7

Use the information for the question(s)below.
Sisyphean industries is seeking to raise capital from a large group of investors to fund a new project.Suppose that the efficient portfolio has an expected return of 14% and a volatility of 20%.Sisyphean's new project is expected to have a volatility of 40% and a 70% correlation with the efficient portfolio.The risk-free rate is 4%.
-The beta for Sisyphean's new project is closest to:

Accepted Answer

A) 1.25. 
B) 1.40. 
C) 0.70. 
D) 1.75. 
A) 1.25. 
B) 1.40. 
C) 0.70. 
D) 1.75.

Question 8

Suppose over the next year Ball Corporation has a return of 12.5%,Lowes Companies has a return of 20%,and Abbott Labs has a return of -10%.The weight on Ball Corporation in your portfolio after one year is closest to:

Accepted Answer

A) 20.0%. 
B) 12.5%. 
C) 20.7%. 
D) 21.7%. 
A) 20.0%. 
B) 12.5%. 
C) 20.7%. 
D) 21.7%.

Question 9

Which of the following equations is INCORRECT?

Accepted Answer

A) E[Rxp] = rf + x(E[Rp] - rf) 
B) E[Rxp] = (1 - x)rf + xE[Rp] 
C) Sharpe ratio =   
D) SD( Rxp)= xSD(Rp) 
A) E[Rxp] = rf + x(E[Rp] - rf) 
B) E[Rxp] = (1 - x)rf + xE[Rp] 
C) Sharpe ratio =   
D) SD( Rxp)= xSD(Rp)

Question 10

Which of the following equations is INCORRECT?

Accepted Answer

A) Cov(Ri,Rj)=   Σ(Ri - Ri)(Rj - Rj) 
B) Var(Rp)= x12Var(R1)+ x22Var(R2)+ 2X1X2Cov(R1,R2) 
C) Corr(Ri,Rj)=   
D) Cov(Ri,Rj)= E[(Ri - E[Ri])(Rj - E[Rj])] 
A) Cov(Ri,Rj)=   Σ(Ri - Ri)(Rj - Rj) 
B) Var(Rp)= x12Var(R1)+ x22Var(R2)+ 2X1X2Cov(R1,R2) 
C) Corr(Ri,Rj)=   
D) Cov(Ri,Rj)= E[(Ri - E[Ri])(Rj - E[Rj])]

Question 11

How is the optimal portfolio choice affected if there are different rates for borrowers and savers?

Accepted Answer

Borrowers will select one risky portfoli

Question 12

Use the information for the question(s)below.
Tom's portfolio consists solely of an investment in Merck stock.Merck has an expected return of 13% and a volatility of 25%.The market portfolio has an expected return of 12% and a volatility of 18%.The risk-free rate is 4%.Assume that the CAPM assumptions hold in the market.
-Assuming that Tom wants to maintain the current volatility of his portfolio,then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:

Accepted Answer

A) 13%. 
B) 15%. 
C) 16%. 
D) 12%. 
A) 13%. 
B) 15%. 
C) 16%. 
D) 12%.

Question 13

Use the table for the question(s)below.
Consider the following covariances between securities:  
-What is the variance on a portfolio that has $2000 invested in Duke Energy,$3000 invested in Microsoft,and $5000 invested in Walmart stock?

Accepted Answer

@#IMG-DLM& @#IMG-DLM& @#IMG-DLM& Varianc

Question 14

You currently own $100,000 worth of Walmart stock.Suppose that Walmart has an expected return of 14% and a volatility of 23%.The market portfolio has an expected return of 12% and a volatility of 16%.The risk-free rate is 5%.Assuming the CAPM assumptions hold,what alternative investment has the lowest possible volatility while having the same expected return as Walmart? What is the volatility of this portfolio?

Accepted Answer

E[RxCML] = rf + x(E[RMkt] - rf

Question 15

Use the information for the question(s)below.
Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Monsters Inc.has a 24% volatility and a correlation with the market of .60,while California Gold Mining has a 32% volatility and a correlation with the market of -.7.Assume the CAPM assumptions hold.
-California Gold Mining's required return is closest to:

Accepted Answer

A) -5%. 
B) 13%. 
C) 15%. 
D) 5%. 
A) -5%. 
B) 13%. 
C) 15%. 
D) 5%.

Question 16

Use the table for the question(s)below.
Consider the following three individuals' portfolios consisting of investments in four stocks:  
-The beta on Paul's portfolio is closest to:

Accepted Answer

A) 1.5. 
B) 1.8. 
C) 1.3. 
D) 1.0. 
A) 1.5. 
B) 1.8. 
C) 1.3. 
D) 1.0.

Question 17

Use the following information to answer the question(s)below.
Your investment portfolio consists of $10,000 worth of Google stock.Suppose that the risk-free rate is 4%,Google stock has an expected return of 14% and a volatility of 35%,and the market portfolio has an expected return of 12% and a volatility of 18%.Assume that the CAPM assumptions hold.
-What alternative investment has the lowest possible volatility while having the same expected return as Google?

Accepted Answer

A) -25% in the risk-free asset and +125% in the market portfolio 
B) -20% in the risk-free asset and +120% in the market portfolio 
C) 0% in the risk-free asset and +100% in the market portfolio 
D) 20% in the risk-free asset and +80% in the market portfolio 
A) -25% in the risk-free asset and +125% in the market portfolio 
B) -20% in the risk-free asset and +120% in the market portfolio 
C) 0% in the risk-free asset and +100% in the market portfolio 
D) 20% in the risk-free asset and +80% in the market portfolio

Question 18

Consider an equally weighted portfolio that contains 100 stocks.If the average volatility of these stocks is 50% and the average correlation between the stocks is .7,then the volatility of this equally weighted portfolio is closest to:

Accepted Answer

A) .72. 
B) .63. 
C) .40. 
D) .50. 
A) .72. 
B) .63. 
C) .40. 
D) .50.

Question 19

Use the information for the question(s)below.
Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a 6% interest rate to invest in the stock market.You invest the entire $20,000 in an exchange traded fund (ETF)with a 12% expected return and a 20% volatility.
-The volatility of your investment is closest to:

Accepted Answer

A) 40%. 
B) 20%. 
C) 30%. 
D) 24%. 
A) 40%. 
B) 20%. 
C) 30%. 
D) 24%.

Question 20

Use the table for the question(s)below.
Consider the following three individuals' portfolios consisting of investments in four stocks:  
-The beta of Peter's portfolio is closest to:

Accepted Answer

A) 0.7. 
B) 0.8. 
C) 1.8. 
D) 1.0. 
A) 0.7. 
B) 0.8. 
C) 1.8. 
D) 1.0.

Exam 11: Optimal Portfolio Choice and the Capital Asset Pricing Model

Which of the following formulas is INCORRECT?

The beta for the risk-free investment is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Suppose over the next year Ball Corporation has a return of 12.5%,Lowes Companies has a return of 20%,and Abbott Labs has a return of -10%.The weight on Ball Corporation in your portfolio after one year is closest to:

Which of the following equations is INCORRECT?

Which of the following equations is INCORRECT?

How is the optimal portfolio choice affected if there are different rates for borrowers and savers?

Use the table for the question(s)below. Consider the following covariances between securities: -What is the variance on a portfolio that has $2000 invested in Duke Energy,$3000 invested in Microsoft,and $5000 invested in Walmart stock?

Use the table for the question(s)below. Consider the following three individuals' portfolios consisting of investments in four stocks: -The beta on Paul's portfolio is closest to:

Consider an equally weighted portfolio that contains 100 stocks.If the average volatility of these stocks is 50% and the average correlation between the stocks is .7,then the volatility of this equally weighted portfolio is closest to:

Use the table for the question(s)below. Consider the following three individuals' portfolios consisting of investments in four stocks: -The beta of Peter's portfolio is closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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