Question 1

Which of the following statements is FALSE?

Accepted Answer

A) To improve the performance of their portfolios,investors who are holding the market portfolio will compare the expected return of each security with its required return from the security market line. 
B) The Sharpe ratio of a portfolio will increase if we sell stocks with positive alphas. 
C) When a stock's alpha is not zero,investors can improve upon the performance of the market portfolio. 
D) When the market portfolio is efficient,all stocks are on the security market line and have an alpha of zero. 
A) To improve the performance of their portfolios,investors who are holding the market portfolio will compare the expected return of each security with its required return from the security market line. 
B) The Sharpe ratio of a portfolio will increase if we sell stocks with positive alphas. 
C) When a stock's alpha is not zero,investors can improve upon the performance of the market portfolio. 
D) When the market portfolio is efficient,all stocks are on the security market line and have an alpha of zero.

Question 2

Use the following information to answer the question(s)below.   The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The beta for the portfolio of the three stocks is closest to:

Accepted Answer

A) 0.92. 
B) 0.94. 
C) 1.00. 
D) 1.02. 
A) 0.92. 
B) 0.94. 
C) 1.00. 
D) 1.02.

Question 3

Suppose that you want to maximize your expected return without increasing your risk.How can you achieve this goal? Without increasing your risk,what is the maximum expected return you can expect?

Accepted Answer

You can maximize your expected return wi

Question 4

Use the following information to answer the question(s)below.   The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The Sharpe Ratio for Wyatt Oil is closest to:

Accepted Answer

A) 0.40. 
B) 0.48. 
C) 0.56. 
D) 0.80. 
A) 0.40. 
B) 0.48. 
C) 0.56. 
D) 0.80.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) We say a portfolio is long those stocks that have negative portfolio weights. 
B) The efficient portfolios are those portfolios offering the highest possible expected return for a given level of volatility. 
C) When two stocks are perfectly negatively correlated,it becomes possible to hold a portfolio that bears absolutely no risk. 
D) The lower the correlation of the securities in a portfolio the lower the volatility we can obtain. 
A) We say a portfolio is long those stocks that have negative portfolio weights. 
B) The efficient portfolios are those portfolios offering the highest possible expected return for a given level of volatility. 
C) When two stocks are perfectly negatively correlated,it becomes possible to hold a portfolio that bears absolutely no risk. 
D) The lower the correlation of the securities in a portfolio the lower the volatility we can obtain.

Question 6

Use the table for the question(s)below.
Consider the following returns:  
-The Volatility on Stock X's returns is closest to:

Accepted Answer

A) 35%. 
B) 10%. 
C) 13%. 
D) 42%. 
A) 35%. 
B) 10%. 
C) 13%. 
D) 42%.

Question 7

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.
-Assume that the EFT you invested in returns -10%,then the realized return on your investment is closest to:

Accepted Answer

A) -20%. 
B) -10%. 
C) -24%. 
D) -26%. 
A) -20%. 
B) -10%. 
C) -24%. 
D) -26%.

Question 8

Use the table for the question(s)below.
Consider the following three individuals' portfolios consisting of investments in four stocks:  
-Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then the required return on Peter's portfolio is closest to:

Accepted Answer

A) 10%. 
B) 12%. 
C) 9%. 
D) 8%. 
A) 10%. 
B) 12%. 
C) 9%. 
D) 8%.

Question 9

Use the following information to answer the question(s)below.   The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-Suppose that Google stock has a beta of 1.06 and Boeing stock has a beta of 1.31.The beta on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest to:

Accepted Answer

A) 1.06. 
B) 1.14. 
C) 1.19. 
D) 1.24. 
A) 1.06. 
B) 1.14. 
C) 1.19. 
D) 1.24.

Question 10

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 highest possible expected return while having the same volatility as Walmart? What is the expected return of this portfolio?

Accepted Answer

SD(RxCML)= xSD(RMkt)
.23 = x(.

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) When stocks are perfectly positively correlated,the set of portfolios is identified graphically by a straight line between them. 
B) An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C) When the correlation between securities is less than 1,the volatility of the portfolio is reduced due to diversification. 
D) Efficient portfolios can be easily ranked,because investors will choose from among those with the highest expected returns. 
A) When stocks are perfectly positively correlated,the set of portfolios is identified graphically by a straight line between them. 
B) An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C) When the correlation between securities is less than 1,the volatility of the portfolio is reduced due to diversification. 
D) Efficient portfolios can be easily ranked,because investors will choose from among those with the highest expected returns.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) The Sharpe ratio measures the ratio of volatility-to-reward provided by a portfolio. 
B) Borrowing money to invest in stocks is referred to as buying stocks on margin. 
C) The Sharpe ratio is the number of standard deviations the portfolio's return would have to fall to under-perform the risk-free investment. 
D) The slope of the line through a given portfolio is often referred to as the Sharpe ratio of the portfolio. 
A) The Sharpe ratio measures the ratio of volatility-to-reward provided by a portfolio. 
B) Borrowing money to invest in stocks is referred to as buying stocks on margin. 
C) The Sharpe ratio is the number of standard deviations the portfolio's return would have to fall to under-perform the risk-free investment. 
D) The slope of the line through a given portfolio is often referred to as the Sharpe ratio of the portfolio.

Question 13

Use the table for the question(s)below.
Consider the following returns:  
-The Correlation between Stock X's and Stock Z's returns is closest to:

Accepted Answer

A) 0.71. 
B) 0.60. 
C) 0.62. 
D) 0.05. 
A) 0.71. 
B) 0.60. 
C) 0.62. 
D) 0.05.

Question 14

Use the following information to answer the question(s)below.
Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks.Assume that these two portfolios are equal in size (market value),the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics:   The risk-free rate is 3.5%.
-The volatility on the market portfolio (which is a 50-50 combination of the value and growth portfolios)is closest to:

Accepted Answer

A) 13.5%. 
B) 15.2%. 
C) 17.1%. 
D) 19.0%. 
A) 13.5%. 
B) 15.2%. 
C) 17.1%. 
D) 19.0%.

Question 15

The beta for the market portfolio is closest to:

Accepted Answer

A) 1. 
B) 0. 
C) Unable to answer this question without knowing the market's expected return. 
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 market's expected return. 
D) Unable to answer this question without knowing the market's volatility.

Question 16

Consider a portfolio consisting of only Microsoft and Walmart stock.Calculate the volatility of such a portfolio when the weight on Microsoft stock is 0%,25%,50%,75%,and 100%

Accepted Answer

Var(Rp)= x12Var(R1)+

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) The volatility declines as the number of stocks in a portfolio grows. 
B) An equally weighted portfolio is a portfolio in which the same amount is invested in each stock. 
C) As the number of stocks in a portfolio grows large,the variance of the portfolio is determined primarily by the average covariance among the stocks. 
D) When combining stocks into a portfolio that puts positive weight on each stock,unless all of the stocks are uncorrelated with the portfolio,the risk of the portfolio will be lower than the weighted average volatility of the individual stocks. 
A) The volatility declines as the number of stocks in a portfolio grows. 
B) An equally weighted portfolio is a portfolio in which the same amount is invested in each stock. 
C) As the number of stocks in a portfolio grows large,the variance of the portfolio is determined primarily by the average covariance among the stocks. 
D) When combining stocks into a portfolio that puts positive weight on each stock,unless all of the stocks are uncorrelated with the portfolio,the risk of the portfolio will be lower than the weighted average volatility of the individual stocks.

Question 18

Use the information for the question(s)below.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT)at $50 per share,200 shares of Lowes Companies,Inc.(LOW)at $30 per share,and 100 shares of Ball Corporation (BLL)at $40 per share.
-The weight on Abbott Labs in your portfolio is:

Accepted Answer

A) 50%. 
B) 40%. 
C) 30%. 
D) 20%. 
A) 50%. 
B) 40%. 
C) 30%. 
D) 20%.

Question 19

Use the following information to answer the question(s)below.   The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The beta for Taggart Transcontinental is closest to:

Accepted Answer

A) 0.75. 
B) 0.80. 
C) 1.00. 
D) 1.10. 
A) 0.75. 
B) 0.80. 
C) 1.00. 
D) 1.10.

Question 20

Use the table for the question(s)below.
Consider the following returns:  
-Calculate the covariance between Stock Y's and Stock Z's returns.

Accepted Answer

The answer of Use the table for the question(s)below.
Consider the...

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

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The beta for the portfolio of the three stocks is closest to:

Suppose that you want to maximize your expected return without increasing your risk.How can you achieve this goal? Without increasing your risk,what is the maximum expected return you can expect?

Use the following information to answer the question(s)below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The Sharpe Ratio for Wyatt Oil is closest to:

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following returns: -The Volatility on Stock X's returns is closest to:

Use the table for the question(s)below. Consider the following three individuals' portfolios consisting of investments in four stocks: -Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then the required return on Peter's portfolio is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following returns: -The Correlation between Stock X's and Stock Z's returns is closest to:

The beta for the market portfolio is closest to:

Consider a portfolio consisting of only Microsoft and Walmart stock.Calculate the volatility of such a portfolio when the weight on Microsoft stock is 0%,25%,50%,75%,and 100%

Which of the following statements is FALSE?

Use the information for the question(s)below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT)at $50 per share,200 shares of Lowes Companies,Inc.(LOW)at $30 per share,and 100 shares of Ball Corporation (BLL)at $40 per share. -The weight on Abbott Labs in your portfolio is:

Use the following information to answer the question(s)below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The beta for Taggart Transcontinental is closest to:

Use the table for the question(s)below. Consider the following returns: -Calculate the covariance between Stock Y's and Stock Z's returns.

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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