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

Use the following information to answer the question(s)below. Luther Industries has 25 million shares outstanding trading at $18 per share.In addition,Luther has $150 million in outstanding debt.Suppose Luther's equity cost of capital is 13%,its debt cost of capital is 7%,and the corporate tax rate is 40%. -Which of the following equations is INCORRECT?

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 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 statements is FALSE?

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 statements is FALSE?

Use the table for the question(s)below. Consider the following three individuals portfolios consisting of investments in four stocks: -Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.

Use the table for the question(s)below. Consider the following three individuals portfolios consisting of investments in four stocks: -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 the market portfolio is closest to:

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. -Assume that the EFT you invested in returns -10%,then the realized return on your investment is closest to:

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%. -You want to maximize your expected return without increasing your risk.Without increasing your volatility beyond its current 10%,the maximum expected return you could earn 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. -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:

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 expected return on the precious metals fund is closest to:

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 expected return on the market portfolio (which is a 50-50 combination of the value and growth portfolios)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 Sharpe Ratio for Wyatt Oil 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. -You currently own $100,000 worth of Wal-Mart stock.Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%.The market portfolio has an expected return of 12% and a volatility of 16%.The risk-free rate is 5%.Assuming the CAPM assumptions hold,what alternative investment has the lowest possible volatility while having the same expected return as Wal-Mart? What is the volatility of this portfolio?

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 required return is closest to:

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 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. -California Gold Mining's beta with the market is closest to:

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