Exam 1: Securities Markets, Efficient Diversification, Risk and Return: Past and Prologue

You are considering investing $1000 in a complete portfolio. The complete portfolio is composed of Treasury notes that pay 5% and a risky portfolio, P, constructed with two risky securities X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately ________ in the risky portfolio. This will mean you will also invest approximately ________ and ________ of your complete portfolio in security X and Y respectively.

You have an APR of 7.5% with continuous compounding. The EAR is ________.

You have the following rates of return for a risky portfolio for several recent years: If you invested $1 000 at the beginning of 2005 your investment at the end of 2008 would be worth ________.

The geometric average of -12%, 20% and 25% is ________.

Based on the outcomes in the table below choose which of the statements is/are correct: I. The covariance of Security A and Security B is zero II. The correlation coefficient between Security A and C is negative III. The correlation coefficient between Security B and C is positive

Consider the following limit order book of a specialist. The last trade in the share occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

Security A has a higher standard deviation of returns than Security B We would expect that ________. I. Security A would have a higher risk premium than Security B II. the likely range of returns for Security A in any given year would be higher than the likely range of returns for Security B III. the Sharpe measure of A will be higher than the Sharpe measure of B.

The formula is used to calculate the ________.

If the bid price is $15.12 and the ask price is $15.14, the bid-ask spread is ________.

You have the following rates of return for a risky portfolio for several recent years: The annualised average return on this investment is ________.

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: An investor with a risk aversion of A = 3 would find that ________ on a risk-return basis.