Question 1

Which of the following statements is false?

Accepted Answer

A)  The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate), divided by the amount of market risk present in the security's returns measured by its beta with the market. 
B)  We refer to the beta of a security with the market portfolio simply as the securities beta. 
C)  There is a linear relationship between a stock's beta and its expected return. 
D)  A security with a negative beta has a negative correlation with the market, which means that this security tend to perform will when the rest of the market is doing poorly. 
A)  The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate), divided by the amount of market risk present in the security's returns measured by its beta with the market. 
B)  We refer to the beta of a security with the market portfolio simply as the securities beta. 
C)  There is a linear relationship between a stock's beta and its expected return. 
D)  A security with a negative beta has a negative correlation with the market, which means that this security tend to perform will when the rest of the market is doing poorly.

Question 2

Use the table for the question(s) below.
Consider the following three individuals portfolios consisting of investments in four stocks:
  
-Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then required return on Peter's Portfolio is closest to:

Accepted Answer

A)  10% 
B)  12% 
C)  9% 
D)  8% 
A)  10% 
B)  12% 
C)  9% 
D)  8%

Question 3

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

Accepted Answer

@#IMG-DLM& r_i = r_f + b(E[R_Mkt] - r_f)

Question 4

Which of the following statements is false?

Accepted Answer

A)  While the sign of the correlation is easy to interpret, its magnitude is not. 
B)  Independent risks are uncorrelated. 
C)  When the covariance equals 0, the returns are uncorrelated. 
D)  To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together. 
A)  While the sign of the correlation is easy to interpret, its magnitude is not. 
B)  Independent risks are uncorrelated. 
C)  When the covariance equals 0, the returns are uncorrelated. 
D)  To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together.

Question 5

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.
-Suppose that Monsters' expected return is 12%.Then Monsters' alpha is closest to:

Accepted Answer

A)  -2.0% 
B)  -1.0% 
C)  1.0% 
D)  0.5% 
A)  -2.0% 
B)  -1.0% 
C)  1.0% 
D)  0.5%

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.
-The weight on Lowes in your portfolio is:

Accepted Answer

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

Question 7

Which of the following statements is false?

Accepted Answer

A)  We can improve the performance of our portfolio by selling stocks with negative alphas. 
B)  The market portfolio is on the SML, and according to the CAPM, since all other portfolios are inefficient they will not fall on the SML. 
C)  The difference between a stock's expected return and its required return according to the security market line is called the stock's alpha. 
D)  The risk premium for any security is proportional to its beta with the market. 
A)  We can improve the performance of our portfolio by selling stocks with negative alphas. 
B)  The market portfolio is on the SML, and according to the CAPM, since all other portfolios are inefficient they will not fall on the SML. 
C)  The difference between a stock's expected return and its required return according to the security market line is called the stock's alpha. 
D)  The risk premium for any security is proportional to its beta with the market.

Question 8

Suppose you have $10,000 in cash to invest.You decide to sell short $5,000 worth of Kinston stock and invest the proceeds from your short sale,plus your $10,000 into one-year U.S.treasury bills earning 5%.At the end of the year,you decide to liquidate your portfolio.Kinston Industries has the following realized returns:
 
The return on your portfolio is closest to:

Accepted Answer

A)  -0.5% 
B)  13.5% 
C)  -2.5% 
D)  14.5% 
A)  -0.5% 
B)  13.5% 
C)  -2.5% 
D)  14.5%

Question 9

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:

Accepted Answer

A)  -20% 
B)  -10% 
C)  -24% 
D)  -26% 
A)  -20% 
B)  -10% 
C)  -24% 
D)  -26%

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 (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 weight on Abbott Labs in your portfolio after one year is closest to:

Accepted Answer

A)  -10.0% 
B)  43.5% 
C)  45.0% 
D)  50.0% 
A)  -10.0% 
B)  43.5% 
C)  45.0% 
D)  50.0%

Question 11

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

Accepted Answer

A)  0.58 
B)  0.29 
C)  0.69 
D)  0.10 
A)  0.58 
B)  0.29 
C)  0.69 
D)  0.10

Question 12

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:

Accepted Answer

A)  0.9 
B)  1.25 
C)  -0.9 
D)  -1.25 
A)  0.9 
B)  1.25 
C)  -0.9 
D)  -1.25

Question 13

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 Rearden Metal is closest to:

Accepted Answer

A)  10.0% 
B)  11.4% 
C)  11.8% 
D)  12.0% 
A)  10.0% 
B)  11.4% 
C)  11.8% 
D)  12.0%

Question 14

Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then calculate the required return on Mary's portfolio.

Accepted Answer

@#IMG-DLM& r_i = r_f + b(E[R_Mkt] - r_f)

Question 15

Which of the following equations is incorrect?

Accepted Answer

A)  E[Rxp] = rf + x(E[Rp] - rf) 
B)  E[Rxp] = (1 - x)rf + xE[Rp] 
C)  Sharpe ratio =   
D)  SD( Rxp) = xSD(Rp) 
A)  E[Rxp] = rf + x(E[Rp] - rf) 
B)  E[Rxp] = (1 - x)rf + xE[Rp] 
C)  Sharpe ratio =   
D)  SD( Rxp) = xSD(Rp)

Question 16

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 highest possible expected return while having the same volatility as Wal-Mart? What is the expected return of this portfolio?

Accepted Answer

SD(R_xCML)= xSD(R_Mkt) .23 = x(.16) =>

Question 17

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%.
-Suppose that Google Stock has a beta of 1.06 and Boeing stock has a beta of 1.31.The beta on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest to:

Accepted Answer

A)  1.06 
B)  1.14 
C)  1.19 
D)  1.24 
A)  1.06 
B)  1.14 
C)  1.19 
D)  1.24

Question 18

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

Accepted Answer

A)  0.05 
B)  0.06 
C)  0.10 
D)  0.71 
A)  0.05 
B)  0.06 
C)  0.10 
D)  0.71

Question 19

Use the table for the question(s) below.
Consider the following covariances between securities:
  
-The variance on a portfolio that is made up of a $6000 investments in Duke Energy and a $4000 investment in Wal-Mart stock is closest to:

Accepted Answer

A)  .050 
B)  .045 
C)  .051 
D)  -0.020 
A)  .050 
B)  .045 
C)  .051 
D)  -0.020

Question 20

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 volatility of his portfolio,then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:

Accepted Answer

A)  13% 
B)  15% 
C)  16% 
D)  12% 
A)  13% 
B)  15% 
C)  16% 
D)  12%

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

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: -Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then required return on Peter's Portfolio is closest to:

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

Which of the following statements is false?

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. -The weight on Lowes in your portfolio is:

Which of the following statements is false?

Use the table for the question(s) below. Consider the following returns: -The Correlation 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 Rearden Metal is closest to:

Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then calculate the required return on Mary's portfolio.

Which of the following equations is incorrect?

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

Use the table for the question(s) below. Consider the following covariances between securities: -The variance on a portfolio that is made up of a $6000 investments in Duke Energy and a $4000 investment in Wal-Mart stock 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

The Capital Asset Pricing Model

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

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

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