Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1. 
B) Volatility is the square root of variance. 
C) The closer the correlation is to 0,the more the returns tend to move together as a result of common risk. 
D) If two stocks move together,their returns will tend to be above or below average at the same time,and the covariance will be positive. 
A) Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1. 
B) Volatility is the square root of variance. 
C) The closer the correlation is to 0,the more the returns tend to move together as a result of common risk. 
D) If two stocks move together,their returns will tend to be above or below average at the same time,and the covariance will be positive.

Question 2

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 required return for Sisyphean's new project is closest to:

Accepted Answer

A) 24%. 
B) 14%. 
C) 18%. 
D) 10%. 
A) 24%. 
B) 14%. 
C) 18%. 
D) 10%.

Question 3

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:  
-The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Accepted Answer

A) 8%. 
B) 9%. 
C) 11%. 
D) 6%. 
A) 8%. 
B) 9%. 
C) 11%. 
D) 6%.

Question 4

Suppose you have $10,000 in cash to invest.You decide to sell short $5000 worth of Kinston stock and invest the proceeds from your short sale,plus your $10,000 into one-year U.S.treasury bills earning 5%.At the end of the year,you decide to liquidate your portfolio.Kinston Industries has the following realized returns:   The return on your portfolio is closest to:

Accepted Answer

A) -0.5%. 
B) 13.5%. 
C) -2.5%. 
D) 14.5%. 
A) -0.5%. 
B) 13.5%. 
C) -2.5%. 
D) 14.5%.

Question 5

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

Accepted Answer

A) 35%. 
B) 31%. 
C) 42%. 
D) 18%. 
A) 35%. 
B) 31%. 
C) 42%. 
D) 18%.

Question 6

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 Lowes Companies in your portfolio after one year is closest to:

Accepted Answer

A) 20.0%. 
B) 34.8%. 
C) 30.0%. 
D) 36.0%. 
A) 20.0%. 
B) 34.8%. 
C) 30.0%. 
D) 36.0%.

Question 7

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 beta with the market is closest to:

Accepted Answer

A) 0.9. 
B) 1.25. 
C) -0.9. 
D) -1.24. 
A) 0.9. 
B) 1.25. 
C) -0.9. 
D) -1.24.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) An investor's preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment. 
B) Conservative investors will invest a small amount in the tangent or efficient portfolio,choosing a portfolio on the line near the risk-free investment. 
C) Only aggressive investors will choose to hold the portfolio of risky assets,the tangent or efficient portfolio. 
D) Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin. 
A) An investor's preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment. 
B) Conservative investors will invest a small amount in the tangent or efficient portfolio,choosing a portfolio on the line near the risk-free investment. 
C) Only aggressive investors will choose to hold the portfolio of risky assets,the tangent or efficient portfolio. 
D) Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin.

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%.
-The expected return for Wyatt Oil is closest to:

Accepted Answer

A) 11.4%. 
B) 11.8%. 
C) 12.0%. 
D) 12.6%. 
A) 11.4%. 
B) 11.8%. 
C) 12.0%. 
D) 12.6%.

Question 10

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 Lowes in your portfolio is:

Accepted Answer

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

Question 11

Use the table for the question(s)below.
Consider the following covariances between securities:  
-The variance on a portfolio that is made up of equal investments in Duke Energy and Microsoft stock is closest to:

Accepted Answer

A) .065. 
B) 0.090. 
C) .149. 
D) -0.020. 
A) .065. 
B) 0.090. 
C) .149. 
D) -0.020.

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 expected return on his portfolio,then the amount that Tom should invest in the market portfolio to minimize his volatility is closest to:

Accepted Answer

A) 100%. 
B) 90%. 
C) 125%. 
D) 113%. 
A) 100%. 
B) 90%. 
C) 125%. 
D) 113%.

Question 13

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 Sharpe ratio for the value stock portfolio is closest to:

Accepted Answer

A) .53. 
B) .58. 
C) .61. 
D) .79. 
A) .53. 
B) .58. 
C) .61. 
D) .79.

Question 14

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 expected return on your investment is closest to:

Accepted Answer

A) 18%. 
B) 20%. 
C) 12%. 
D) 24%. 
A) 18%. 
B) 20%. 
C) 12%. 
D) 24%.

Question 15

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 beta of the precious metals fund with the Luther Fund   is closest to:

Accepted Answer

A) -0.3. 
B) -0.6. 
C) 0.3. 
D) 0.6. 
A) -0.3. 
B) -0.6. 
C) 0.3. 
D) 0.6.

Question 16

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.
-Will adding the precious metals fund improve your portfolio?

Accepted Answer

Yes @#IMG-DLM& = @#IMG-DLM& = @#IMG-DLM& = -0.3
ri = rf + @#IMG-DLM& × (E[Rp] -

Question 17

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

Accepted Answer

Rp = x1R1

Question 18

Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?

Accepted Answer

A) Investors have homogeneous expectations regarding the volatilities,correlation,and expected returns of securities. 
B) Investors have homogeneous risk-averse preferences toward taking on risk. 
C) Investors hold only efficient portfolios of traded securities,that is portfolios that yield the maximum expected return for the given level of volatility. 
D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate. 
A) Investors have homogeneous expectations regarding the volatilities,correlation,and expected returns of securities. 
B) Investors have homogeneous risk-averse preferences toward taking on risk. 
C) Investors hold only efficient portfolios of traded securities,that is portfolios that yield the maximum expected return for the given level of volatility. 
D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.

Question 19

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.
-Suppose that California Gold Mining's expected return is 2%.Then California Gold Mining's alpha is closest to:

Accepted Answer

A) -3%. 
B) -13%. 
C) 7%. 
D) -11%. 
A) -3%. 
B) -13%. 
C) 7%. 
D) -11%.

Question 20

Use the table for the question(s)below.
Consider the following covariances between securities:  
-The variance on a portfolio that is made up of a $6000 investment in Microsoft and a $4000 investment in Walmart stock is closest to:

Accepted Answer

Total invested = $6000 + $4000

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

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

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

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 Lowes Companies in your portfolio after one year is closest to:

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 expected return for Wyatt Oil is closest to:

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 Lowes in your portfolio is:

Use the table for the question(s)below. Consider the following covariances between securities: -The variance on a portfolio that is made up of equal investments in Duke Energy and Microsoft stock is closest to:

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

Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?

Use the table for the question(s)below. Consider the following covariances between securities: -The variance on a portfolio that is made up of a $6000 investment in Microsoft and a $4000 investment in Walmart stock 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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