Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Stock returns will tend to move together if they are affected similarly by economic events. 
B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C) Almost all of the correlations between stocks are negative,illustrating the general tendency of stocks to move together. 
D) With a positive amount invested in each stock,the more the stocks move together and the higher their covariance or correlation,the more variable the portfolio will be. 
A) Stock returns will tend to move together if they are affected similarly by economic events. 
B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C) Almost all of the correlations between stocks are negative,illustrating the general tendency of stocks to move together. 
D) With a positive amount invested in each stock,the more the stocks move together and the higher their covariance or correlation,the more variable the portfolio will be.

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 Sharpe Ratio for Rearden Metal is closest to:

Accepted Answer

A) 0.40. 
B) 0.56. 
C) 0.80. 
D) 1.00. 
A) 0.40. 
B) 0.56. 
C) 0.80. 
D) 1.00.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) Without trading,the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. 
B) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. 
C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. 
D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio. 
A) Without trading,the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. 
B) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. 
C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. 
D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

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' required return is closest to:

Accepted Answer

A) 10.0%. 
B) 13.0%. 
C) 11.5%. 
D) 15.5%. 
A) 10.0%. 
B) 13.0%. 
C) 11.5%. 
D) 15.5%.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) A portfolio that consists of a long position in the risk-free investment is known as a levered portfolio. 
B) The optimal portfolio will not depend on the investor's personal tradeoff between risk and return. 
C) The volatility of the risk-free investment is zero. 
D) Our total volatility is only a fraction of the volatility of the efficient portfolio,based on the amount we invest in the risk-free asset. 
A) A portfolio that consists of a long position in the risk-free investment is known as a levered portfolio. 
B) The optimal portfolio will not depend on the investor's personal tradeoff between risk and return. 
C) The volatility of the risk-free investment is zero. 
D) Our total volatility is only a fraction of the volatility of the efficient portfolio,based on the amount we invest in the risk-free asset.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) Because all other risk is diversifiable,it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk,and therefore determines its cost of capital. 
B) If a security's expected return exceeds its required return given our current portfolio,then we can improve the performance of our portfolio by adding more of the security. 
C) The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. 
D) As we buy shares of a security i,its correlation with our portfolio P will increase,ultimately raising its required return until E[Ri] = Rp. 
A) Because all other risk is diversifiable,it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk,and therefore determines its cost of capital. 
B) If a security's expected return exceeds its required return given our current portfolio,then we can improve the performance of our portfolio by adding more of the security. 
C) The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. 
D) As we buy shares of a security i,its correlation with our portfolio P will increase,ultimately raising its required return until E[Ri] = Rp.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) The Sharpe ratio of the portfolio tells us how much our expected return will increase for a given increase in volatility. 
B) We should continue to trade securities until the expected return of each security equals its required return. 
C) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. 
D) If security i's required return exceeds its expected return,then adding more of it will improve the performance of the portfolio. 
A) The Sharpe ratio of the portfolio tells us how much our expected return will increase for a given increase in volatility. 
B) We should continue to trade securities until the expected return of each security equals its required return. 
C) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. 
D) If security i's required return exceeds its expected return,then adding more of it will improve the performance of the portfolio.

Question 8

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 Wyatt Oil 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 9

Use the table for the question(s)below.
Consider the following covariances between securities:  
-What is the variance on a portfolio that has $3000 invested in Duke Energy,$4000 invested in Microsoft,and $3000 invested in Walmart stock?

Accepted Answer

Variance o

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 Ball Corporation in your portfolio is:

Accepted Answer

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

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B) We can rule out inefficient portfolios because they represent inferior investment choices. 
C) The volatility of the portfolio will differ,depending on the correlation between the securities in the portfolio. 
D) Correlation has no effect on the expected return of a portfolio. 
A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B) We can rule out inefficient portfolios because they represent inferior investment choices. 
C) The volatility of the portfolio will differ,depending on the correlation between the securities in the portfolio. 
D) Correlation has no effect on the expected return of a portfolio.

Question 12

Explain how having different interest rates for borrowing and lending affect the CAPM and the SML.

Accepted Answer

The basic conclusions of the CAPM will s

Question 13

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

Accepted Answer

A) 0.10. 
B) 0.29. 
C) 0.12. 
D) 0.69. 
A) 0.10. 
B) 0.29. 
C) 0.12. 
D) 0.69.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) The expected return of a portfolio should correspond to the portfolio's beta. 
B) Graphically the line through the risk-free investment and the market portfolio is called the capital market line (CML). 
C) The beta of a portfolio is the weighted average beta of the securities in the portfolio. 
D) By holding a negative beta security,an investor can reduce the overall market risk of her portfolio. 
A) The expected return of a portfolio should correspond to the portfolio's beta. 
B) Graphically the line through the risk-free investment and the market portfolio is called the capital market line (CML). 
C) The beta of a portfolio is the weighted average beta of the securities in the portfolio. 
D) By holding a negative beta security,an investor can reduce the overall market risk of her portfolio.

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 Sharpe Ratio for Rearden Metal is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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 Wyatt Oil is closest to:

Use the table for the question(s)below. Consider the following covariances between securities: -What is the variance on a portfolio that has $3000 invested in Duke Energy,$4000 invested in Microsoft,and $3000 invested in Walmart stock?

Which of the following statements is FALSE?

Explain how having different interest rates for borrowing and lending affect the CAPM and the SML.

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

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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