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

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%. -Which of the following equations is INCORRECT?

Use the table for the question(s)below. Consider the following expected returns,volatilities,and correlations: -Consider a portfolio consisting of only Microsoft and Wal-Mart stock.Calculate the expected return on such a portfolio when the weight on Microsoft stock is 0%,25%,50%,75%,and 100%

Use the information for the question(s)below. Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 10%.The efficient (tangent)portfolio has an expected return of 17% and a volatility of 12%.The risk-free rate of interest is 5%. -Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following covariances between securities: -Which of the following statements is FALSE?

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:

Use the table for the question(s)below. Consider the following covariances between securities: -Consider an equally weighted portfolio that contains 100 stocks.If the average volatility of these stocks is 50% and the average correlation between the stocks is .7,then the volatility of this equally weighted portfolio is closest to:

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' beta with the market 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 (LOW)at $30 per share,and 100 shares of Ball Corporation (BLL)at $40 per share. -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 covariances between securities: -Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following expected returns,volatilities,and correlations: -Which of the following statements is FALSE?

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 returns: -The Correlation between Stock X's and Stock Z's returns is closest to:

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:

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?

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 minimum volatility that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:

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 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. -The beta for the market portfolio is closest to:

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:

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 table for the question(s)below. Consider the following covariances between securities: -Which of the following statements is FALSE?