Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Investors may have different information regarding expected returns,correlations,and volatilities,but they correctly interpret that information and the information contained in market prices and they adjust their estimates of expected returns in a rational way. 
B) Investors may learn different information through their own research and observations,but as long as they understand the differences in information and learn from other investors by observing prices,the CAPM conclusions still stand. 
C) Every investor,regardless of how much information he has access to,can guarantee himself an alpha of zero by holding the market portfolio. 
D) The CAPM requires making the strong assumption of homogeneous expectations and completely describes investor behavior. 
A) Investors may have different information regarding expected returns,correlations,and volatilities,but they correctly interpret that information and the information contained in market prices and they adjust their estimates of expected returns in a rational way. 
B) Investors may learn different information through their own research and observations,but as long as they understand the differences in information and learn from other investors by observing prices,the CAPM conclusions still stand. 
C) Every investor,regardless of how much information he has access to,can guarantee himself an alpha of zero by holding the market portfolio. 
D) The CAPM requires making the strong assumption of homogeneous expectations and completely describes investor behavior.

Question 2

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 return on your portfolio over the year is:

Accepted Answer

A) 0%. 
B) 7.5%. 
C) 3.5%. 
D) 5.0%. 
A) 0%. 
B) 7.5%. 
C) 3.5%. 
D) 5.0%.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) The market portfolio is the efficient portfolio. 
B) Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C) If we plot individual securities according to their expected return and beta,the CAPM implies that they should all fall along the CML. 
D) As savvy investors attempt to trade to improve their portfolios,they raise the price and lower the expected return of the positive alpha stocks,and they depress the price and raise the expected return of negative alpha stocks,until the stocks are once again on the security market line and the market portfolio is efficient. 
A) The market portfolio is the efficient portfolio. 
B) Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C) If we plot individual securities according to their expected return and beta,the CAPM implies that they should all fall along the CML. 
D) As savvy investors attempt to trade to improve their portfolios,they raise the price and lower the expected return of the positive alpha stocks,and they depress the price and raise the expected return of negative alpha stocks,until the stocks are once again on the security market line and the market portfolio is efficient.

Question 4

Which of the following equations is INCORRECT?

Accepted Answer

A) xi =   
B) Rp = Σi xiRi 
C) Rp = x1R1 + x2R2 + ...+ xnRn 
D) E[Rp] = E[Σi xiRi] 
A) xi =   
B) Rp = Σi xiRi 
C) Rp = x1R1 + x2R2 + ...+ xnRn 
D) E[Rp] = E[Σi xiRi]

Question 5

Use the information for the question(s)below.
You are presently invested in the Luther Fund,a broad-based mutual fund that invests in stocks and other securities.The Luther Fund has an expected return of 14% and a volatility of 20%.Risk-free Treasury bills are currently offering returns of 4%.You are considering adding a precious metals fund to your current portfolio.The metals fund has an expected return of 10%,a volatility of 30%,and a correlation of -.20 with the Luther Fund.
-The required return on the precious metals fund is closest to:

Accepted Answer

A) -3%. 
B) 4%. 
C) 1%. 
D) 10%. 
A) -3%. 
B) 4%. 
C) 1%. 
D) 10%.

Question 6

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.If the risk-free interest rate is 4% and the expected return from the market portfolio is 12%,then the expected return on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest to:

Accepted Answer

A) 12.5%. 
B) 13.1%. 
C) 13.5%. 
D) 13.9%. 
A) 12.5%. 
B) 13.1%. 
C) 13.5%. 
D) 13.9%.

Question 7

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:  
-The volatility of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Accepted Answer

A) 9%. 
B) 14%. 
C) 11%. 
D) 12%. 
A) 9%. 
B) 14%. 
C) 11%. 
D) 12%.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) A stock's return is perfectly positively correlated with itself. 
B) When the covariance equals 0,the stocks have no tendency to move either together or in opposition of one another. 
C) The closer the correlation is to -1,the more the returns tend to move in opposite directions. 
D) The variance of a portfolio depends only on the variance of the individual stocks. 
A) A stock's return is perfectly positively correlated with itself. 
B) When the covariance equals 0,the stocks have no tendency to move either together or in opposition of one another. 
C) The closer the correlation is to -1,the more the returns tend to move in opposite directions. 
D) The variance of a portfolio depends only on the variance of the individual stocks.

Question 9

Which of the following equations is INCORRECT?

Accepted Answer

A) E[RxCML] = rf + x(E[RMkt] + rf) 
B) ri = rf + b(E[RMkt] - rf) 
C) SD(RxCML)= xSD(RMkt) 
D) E[RxCML] = (1 - x)rf + xE[RMkt] 
A) E[RxCML] = rf + x(E[RMkt] + rf) 
B) ri = rf + b(E[RMkt] - rf) 
C) SD(RxCML)= xSD(RMkt) 
D) E[RxCML] = (1 - x)rf + xE[RMkt]

Question 10

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

Accepted Answer

A) 0.05. 
B) 0.06. 
C) 0.10. 
D) 0.71. 
A) 0.05. 
B) 0.06. 
C) 0.10. 
D) 0.71.

Question 11

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You expect a return of 16% for Merck and 12% for Home Depot.What is the expected return on your portfolio?

Accepted Answer

A) 13.50% 
B) 14.00% 
C) 13.75% 
D) 14.50% 
A) 13.50% 
B) 14.00% 
C) 13.75% 
D) 14.50%

Question 12

Use the table for the question(s)below.
Consider the following returns:  
-The variance on a portfolio that is made up of equal investments in Stock X and Stock Z is closest to:

Accepted Answer

A) 0.62. 
B) 0.05. 
C) 0.12. 
D) 0.06. 
A) 0.62. 
B) 0.05. 
C) 0.12. 
D) 0.06.

Question 13

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:  
-The expected return of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Accepted Answer

A) 21%. 
B) 12%. 
C) 27%. 
D) 18%. 
A) 21%. 
B) 12%. 
C) 27%. 
D) 18%.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) If we increase the fraction invested in the efficient portfolio beyond 100%,we are short selling the risk-free investment. 
B) As we increase the fraction invested in the efficient portfolio,we increase our risk premium but not our risk proportionately. 
C) To earn the highest possible expected return for any level of volatility we must find the portfolio that generates the steepest possible line when combined with the risk-free investment. 
D) Every investor should invest in the tangent portfolio independent of his or her taste for risk. 
A) If we increase the fraction invested in the efficient portfolio beyond 100%,we are short selling the risk-free investment. 
B) As we increase the fraction invested in the efficient portfolio,we increase our risk premium but not our risk proportionately. 
C) To earn the highest possible expected return for any level of volatility we must find the portfolio that generates the steepest possible line when combined with the risk-free investment. 
D) Every investor should invest in the tangent portfolio independent of his or her taste for risk.

Question 15

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

Accepted Answer

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

Question 16

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 market is closest to:

Accepted Answer

A) 0.80. 
B) 1.00. 
C) 1.10. 
D) 1.25. 
A) 0.80. 
B) 1.00. 
C) 1.10. 
D) 1.25.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio. 
B) The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights. 
C) The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio. 
D) The volatility declines as the number of stocks in a portfolio grows. 
A) The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio. 
B) The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights. 
C) The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio. 
D) The volatility declines as the number of stocks in a portfolio grows.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities. 
B) In the real world,investors have different information and expectations regarding securities. 
C) The SML is still valid when interest rates differ. 
D) When borrowing and lending occur at different rates there are different tangent portfolios identified. 
A) Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities. 
B) In the real world,investors have different information and expectations regarding securities. 
C) The SML is still valid when interest rates differ. 
D) When borrowing and lending occur at different rates there are different tangent portfolios identified.

Question 19

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 amount that Tom should invest in the market portfolio to maximize his expected return is closest to:

Accepted Answer

A) 72%. 
B) 92%. 
C) 110%. 
D) 139%. 
A) 72%. 
B) 92%. 
C) 110%. 
D) 139%.

Question 20

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 highest possible expected return while having the same volatility 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) -94% in the risk-free asset and +194% in the market portfolio 
D) 6% in the risk-free asset and +94% 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) -94% in the risk-free asset and +194% in the market portfolio 
D) 6% in the risk-free asset and +94% in the market portfolio

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

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 return on your portfolio over the year is:

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

Use the table for the question(s)below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

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

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You expect a return of 16% for Merck and 12% for Home Depot.What is the expected return on your portfolio?

Use the table for the question(s)below. Consider the following returns: -The variance on a portfolio that is made up of equal investments in Stock X and Stock Z is closest to:

Use the table for the question(s)below. Consider the following expected returns,volatilities,and correlations: -The expected return of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Which of the following statements is FALSE?

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

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 market is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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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