Question 1

The beta of a security measures its ________ due to market risk relative to the market as a whole.

Accepted Answer

A)  return 
B)  volatility 
C)  profitability 
D)  performance 
A)  return 
B)  volatility 
C)  profitability 
D)  performance

Question 2

Which of the following statements is false?

Accepted Answer

A)  The tangent portfolio is efficient and, once we include the risk-free investment, all efficient portfolios are combinations of the risk-free investment and the tangent portfolio. 
B)  The optimal portfolio of risky investments depends on how conservative or aggressive the investor is. 
C)  By combining the efficient portfolio with the risk-free investment, an investor will earn the highest possible expected return for any level of volatility her or she is willing to bear. 
D)  The efficient portfolio is the tangent portfolio, the portfolio with the highest Sharpe ratio in the economy. 
A)  The tangent portfolio is efficient and, once we include the risk-free investment, all efficient portfolios are combinations of the risk-free investment and the tangent portfolio. 
B)  The optimal portfolio of risky investments depends on how conservative or aggressive the investor is. 
C)  By combining the efficient portfolio with the risk-free investment, an investor will earn the highest possible expected return for any level of volatility her or she is willing to bear. 
D)  The efficient portfolio is the tangent portfolio, the portfolio with the highest Sharpe ratio in the economy.

Question 3

________ portfolio of risky securities must ________ the market portfolio.

Accepted Answer

A)  The inefficient, equal 
B)  The efficient, not equal 
C)  The efficient, equal 
D)  The inefficient, not equal 
A)  The inefficient, equal 
B)  The efficient, not equal 
C)  The efficient, equal 
D)  The inefficient, not equal

Question 4

Correlation has ________ effect on the expected return of a portfolio.

Accepted Answer

A)  a positive 
B)  zero 
C)  a negative 
D)  none of the above 
A)  a positive 
B)  zero 
C)  a negative 
D)  none of the above

Question 5

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:

Accepted Answer

A)  -3% 
B)  4% 
C)  1% 
D)  10% 
A)  -3% 
B)  4% 
C)  1% 
D)  10%

Question 6

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 over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is

Accepted Answer

A)  $21,000 
B)  $20,000 
C)  $20,700 
D)  $21,500 
A)  $21,000 
B)  $20,000 
C)  $20,700 
D)  $21,500

Question 7

Which of the following equations is incorrect?

Accepted Answer

A)  Cov(Ri,Rj) =   Σ(Ri - Ri)(Rj - Rj) 
B)  Var(Rp) = x12Var(R1) + x22Var(R2) + 2X1X2Cov(R1,R2) 
C)  Corr(Ri,Rj) =   
D)  Cov(Ri,Rj) = E[(Ri - E[Ri])(Rj - E[Rj])] 
A)  Cov(Ri,Rj) =   Σ(Ri - Ri)(Rj - Rj) 
B)  Var(Rp) = x12Var(R1) + x22Var(R2) + 2X1X2Cov(R1,R2) 
C)  Corr(Ri,Rj) =   
D)  Cov(Ri,Rj) = E[(Ri - E[Ri])(Rj - E[Rj])]

Question 8

Which of the following formulas is incorrect?

Accepted Answer

A)  Variance of an equally Weighted Portfolio = (1 -   )(Average Variance of Individual Stocks) +   (Average covariance between the stocks) 
B)  Variance of a portfolio =     
C)  Variance of a portfolio =   
D)  Variance of a portfolio =   
A)  Variance of an equally Weighted Portfolio = (1 -   )(Average Variance of Individual Stocks) +   (Average covariance between the stocks) 
B)  Variance of a portfolio =     
C)  Variance of a portfolio =   
D)  Variance of a portfolio =

Question 9

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%.
-The Sharpe ratio for your portfolio is closest to:

Accepted Answer

A)  1.2 
B)  0.6 
C)  1.0 
D)  0.7 
A)  1.2 
B)  0.6 
C)  1.0 
D)  0.7

Question 10

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:

Accepted Answer

A)  12.0% 
B)  12.5% 
C)  13.4% 
D)  15.0% 
A)  12.0% 
B)  12.5% 
C)  13.4% 
D)  15.0%

Question 11

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 beta for Sisyphean's new project is closest to:

Accepted Answer

A)  1.25 
B)  1.40 
C)  0.70 
D)  1.75 
A)  1.25 
B)  1.40 
C)  0.70 
D)  1.75

Question 12

The amount of risk that will remain depends on the degree to which the stocks are exposed to

Accepted Answer

A)  independent risks. 
B)  diversifiable risks. 
C)  common risks. 
D)  idiosyncratic risks. 
A)  independent risks. 
B)  diversifiable risks. 
C)  common risks. 
D)  idiosyncratic risks.

Question 13

The efficient portfolio provides the benchmark that identifies ________ present in the economy.

Accepted Answer

A)  the nonsystematic risk 
B)  the uncommon risk 
C)  the undiversifiable risk 
D)  the systematic risk 
A)  the nonsystematic risk 
B)  the uncommon risk 
C)  the undiversifiable risk 
D)  the systematic risk

Question 14

Use the table for the question(s) below.
Consider the following returns:  
-Calculate the variance on a portfolio that is made up of equal investments in Home Depot and IBM stock.

Accepted Answer

@#IMG-DLM& Var(R_p)= x₁²^Var(R₁)+ x₂²^Var(R₂)+ 2X₁X₂Cov(R₁,

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

Accepted Answer

Yes @#IMG-DLM& = @#IMG-DLM& = @#IMG-DLM& = -0.3 r_i = r_f + @#IMG-DLM& × (E[R_p] - r_f)=

Question 16

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

Accepted Answer

A)  35% 
B)  10% 
C)  13% 
D)  42% 
A)  35% 
B)  10% 
C)  13% 
D)  42%

Question 17

Which of the following statements is false?

Accepted Answer

A)  The Sharpe ratio measures the ratio of volatility-to-reward provided by a portfolio. 
B)  Borrowing money to invest in stocks is referred to as buying stocks on margin. 
C)  The Sharpe ratio is the number of standard deviations the portfolio's return would have to fall to under-perform the risk-free investment. 
D)  The slope of the line through a given portfolio is often referred to as the Sharpe ratio of the portfolio. 
A)  The Sharpe ratio measures the ratio of volatility-to-reward provided by a portfolio. 
B)  Borrowing money to invest in stocks is referred to as buying stocks on margin. 
C)  The Sharpe ratio is the number of standard deviations the portfolio's return would have to fall to under-perform the risk-free investment. 
D)  The slope of the line through a given portfolio is often referred to as the Sharpe ratio of the portfolio.

Question 18

The efficient portfolio offers ________ Sharpe ratio and therefore ________ risk-return tradeoff available.

Accepted Answer

A)  the highest, the best 
B)  the lowest, the best 
C)  the highest, the lowest 
D)  the lowest, the worst 
A)  the highest, the best 
B)  the lowest, the best 
C)  the highest, the lowest 
D)  the lowest, the worst

Question 19

Which of the following statements is false?

Accepted Answer

A)  The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio. 
B)  The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights. 
C)  The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio. 
D)  The volatility declines as the number of stocks in a portfolio grows. 
A)  The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio. 
B)  The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights. 
C)  The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio. 
D)  The volatility declines as the number of stocks in a portfolio grows.

Question 20

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:

Accepted Answer

A)  .72 
B)  .63 
C)  .40 
D)  .50 
A)  .72 
B)  .63 
C)  .40 
D)  .50

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

The beta of a security measures its ________ due to market risk relative to the market as a whole.

Which of the following statements is false?

________ portfolio of risky securities must ________ the market portfolio.

Correlation has ________ effect on the expected return of a portfolio.

Which of the following equations is incorrect?

Which of the following formulas is incorrect?

The amount of risk that will remain depends on the degree to which the stocks are exposed to

The efficient portfolio provides the benchmark that identifies ________ present in the economy.

Use the table for the question(s) below. Consider the following returns: -Calculate the variance on a portfolio that is made up of equal investments in Home Depot and IBM stock.

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

Which of the following statements is false?

The efficient portfolio offers ________ Sharpe ratio and therefore ________ risk-return tradeoff available.

Which of the following statements is false?

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:

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Bonds

Valuing Stocks

Capital Markets and the Pricing of Risk

Estimating the Cost of Capital

Investor Behaviour 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

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

portfolio of risky securities must the market portfolio.

The efficient portfolio offers Sharpe ratio and therefore risk-return tradeoff available.