Question 1

Which of the following statements is false?

Accepted Answer

A)  An investor's preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment. 
B)  Conservative investors will invest a small amount in the tangent or efficient portfolio, choosing a portfolio on the line near the risk-free investment 
C)  Only aggressive investors will choose to hold the portfolio of risky assets, the tangent or efficient portfolio. 
D)  Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin. 
A)  An investor's preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment. 
B)  Conservative investors will invest a small amount in the tangent or efficient portfolio, choosing a portfolio on the line near the risk-free investment 
C)  Only aggressive investors will choose to hold the portfolio of risky assets, the tangent or efficient portfolio. 
D)  Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin.

Question 2

Which of the following statements is false?

Accepted Answer

A)  Stock returns will tend to move together if they are affect similarly by economic events. 
B)  Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C)  Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. 
D)  With a positive amount invest in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be. 
A)  Stock returns will tend to move together if they are affect similarly by economic events. 
B)  Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C)  Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. 
D)  With a positive amount invest in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be.

Question 3

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 amount that Tom should invest in the market portfolio to maximize his expected return is closest to:

Accepted Answer

A)  72% 
B)  92% 
C)  110% 
D)  140% 
A)  72% 
B)  92% 
C)  110% 
D)  140%

Question 4

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:

Accepted Answer

A)  11.4% 
B)  11.8% 
C)  12.0% 
D)  12.6% 
A)  11.4% 
B)  11.8% 
C)  12.0% 
D)  12.6%

Question 5

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 Sharpe ratio for the market (which is a 50-50 combination of the value and growth portfolios)portfolio is closest to:

Accepted Answer

A)  .53 
B)  .58 
C)  .61 
D)  .79 
A)  .53 
B)  .58 
C)  .61 
D)  .79

Question 6

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

Question 7

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
  
-The volatility of a portfolio that is consists of a long position of $10000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Accepted Answer

A)  9% 
B)  14% 
C)  11% 
D)  12% 
A)  9% 
B)  14% 
C)  11% 
D)  12%

Question 8

Which of the following statements is false?

Accepted Answer

A)  A portfolio that consists of a long position in the risk-free investment is known as a levered portfolio. 
B)  The optimal portfolio will not depend on the investor's personal tradeoff between risk and return. 
C)  The volatility of the risk-free investment is zero. 
D)  Our total volatility is only a fraction of the volatility of the efficient portfolio, based on the amount we invest in the risk free asset. 
A)  A portfolio that consists of a long position in the risk-free investment is known as a levered portfolio. 
B)  The optimal portfolio will not depend on the investor's personal tradeoff between risk and return. 
C)  The volatility of the risk-free investment is zero. 
D)  Our total volatility is only a fraction of the volatility of the efficient portfolio, based on the amount we invest in the risk free asset.

Question 9

Which of the following statements is false?

Accepted Answer

A)  The volatility declines as the number of stocks in a portfolio grows. 
B)  An equally weighted portfolio is a portfolio in which the same amount is invested in each stock. 
C)  As the number of stocks in a portfolio grows large, the variance of the portfolio is determined primarily by the average covariance among the stocks. 
D)  When combining stocks into a portfolio that puts positive weight on each stock, unless all of the stocks are uncorrelated with the portfolio, the risk of the portfolio will be lower than the weighted average volatility of the individual stocks. 
A)  The volatility declines as the number of stocks in a portfolio grows. 
B)  An equally weighted portfolio is a portfolio in which the same amount is invested in each stock. 
C)  As the number of stocks in a portfolio grows large, the variance of the portfolio is determined primarily by the average covariance among the stocks. 
D)  When combining stocks into a portfolio that puts positive weight on each stock, unless all of the stocks are uncorrelated with the portfolio, the risk of the portfolio will be lower than the weighted average volatility of the individual stocks.

Question 10

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 on the portfolio of the three stocks 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 11

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?

Accepted Answer

A)  E[RxCML] = rf + x(E[RMkt] + rf) 
B)  ri = rf + b(E[RMkt] - rf) 
C)  SD(RxCML)= xSD(RMkt) 
D)  E[RxCML] = (1 - x)rf + xE[RMkt] 
A)  E[RxCML] = rf + x(E[RMkt] + rf) 
B)  ri = rf + b(E[RMkt] - rf) 
C)  SD(RxCML)= xSD(RMkt) 
D)  E[RxCML] = (1 - x)rf + xE[RMkt]

Question 12

Which of the following statements is false?

Accepted Answer

A)  When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. 
B)  An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C)  When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. 
D)  Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns. 
A)  When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. 
B)  An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C)  When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. 
D)  Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Question 13

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 Microsoft and a $4000 investment in Wal-Mart stock is closest to:

Accepted Answer

Total invested = $6000 + $4000

Question 14

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:

Accepted Answer

A)  1.3 
B)  1.0 
C)  0.6 
D)  0.8 
A)  1.3 
B)  1.0 
C)  0.6 
D)  0.8

Question 15

Which of the following statements is false?

Accepted Answer

A)  The expected return of a portfolio should correspond to the portfolio's beta. 
B)  Graphically the line through the risk-free investment and the market portfolio is called the capital market line (CML). 
C)  The beta of a portfolio is the weighted average beta of the securities in the portfolio. 
D)  By holding a negative beta security, an investor can reduce the overall market risk of her portfolio. 
A)  The expected return of a portfolio should correspond to the portfolio's beta. 
B)  Graphically the line through the risk-free investment and the market portfolio is called the capital market line (CML). 
C)  The beta of a portfolio is the weighted average beta of the securities in the portfolio. 
D)  By holding a negative beta security, an investor can reduce the overall market risk of her portfolio.

Question 16

Which of the following statements is false?

Accepted Answer

A)  Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1. 
B)  Volatility is the square root of variance. 
C)  The closer the correlation is to 0, the more the returns tend to move together as a result of common risk. 
D)  If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive. 
A)  Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1. 
B)  Volatility is the square root of variance. 
C)  The closer the correlation is to 0, the more the returns tend to move together as a result of common risk. 
D)  If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive.

Question 17

Which of the following statements is false?

Accepted Answer

A)  The market portfolio is the efficient portfolio. 
B)  Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C)  If we plot individual securities according to their expected return and beta, the CAPM implies that they should all fall along the CML. 
D)  As savvy investors attempt to trade to improve their portfolios, they raise the price and lower the expected return of the positive alpha stocks, and they depress the price and raise the expected return of negative alpha stocks, until the stocks are once again on the security market line and the market portfolio is efficient. 
A)  The market portfolio is the efficient portfolio. 
B)  Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C)  If we plot individual securities according to their expected return and beta, the CAPM implies that they should all fall along the CML. 
D)  As savvy investors attempt to trade to improve their portfolios, they raise the price and lower the expected return of the positive alpha stocks, and they depress the price and raise the expected return of negative alpha stocks, until the stocks are once again on the security market line and the market portfolio is efficient.

Question 18

Use the information for the question(s) below.
You are presently invested in the Luther Fund, a broad based mutual fund that invest 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 beta of the precious metals fund with the Luther Fund   is closest to:

Accepted Answer

A)  -0.3 
B)  -0.6 
C)  0.3 
D)  0.6 
A)  -0.3 
B)  -0.6 
C)  0.3 
D)  0.6

Question 19

Which of the following statements is false?

Accepted Answer

A)  The Sharpe ratio if the portfolio tells us how much our expected return will increase for a given increase in volatility. 
B)  We should continue to trade securities until the expected return of each security equals its required return. 
C)  The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. 
D)  If security i's required return exceeds its expected return, then adding more of it will improve the performance of the portfolio. 
A)  The Sharpe ratio if the portfolio tells us how much our expected return will increase for a given increase in volatility. 
B)  We should continue to trade securities until the expected return of each security equals its required return. 
C)  The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. 
D)  If security i's required return exceeds its expected return, then adding more of it will improve the performance of the portfolio.

Question 20

Use the following information to answer the question(s) below.
Your investment portfolio consists of $10,000 worth of Google stock. Suppose that the risk-free rate is 4%, Google stock has an expected return of 14% and a volatility of 35%, and the market portfolio has an expected return of 10% and a volatility of 18%. Assume that the CAPM assumptions hold.
-What alternative investment has the lowest possible volatility while having the same expected return as Google?

Accepted Answer

A)  -25% in the risk-free asset and +125% in the market portfolio 
B)  -20% in the risk-free asset and +120% in the market portfolio 
C)  0% in the risk-free asset and +100% in the market portfolio 
D)  20% in the risk-free asset and +80% in the market portfolio 
A)  -25% in the risk-free asset and +125% in the market portfolio 
B)  -20% in the risk-free asset and +120% in the market portfolio 
C)  0% in the risk-free asset and +100% in the market portfolio 
D)  20% in the risk-free asset and +80% in the market portfolio

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

Which of the following statements is false?

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 expected return for Wyatt Oil is closest to:

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 table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The volatility of a portfolio that is consists of a long position of $10000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Which of the following statements is false?

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 expected return on the portfolio of the three stocks is closest to:

Which of the following statements is false?

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 Microsoft and a $4000 investment in Wal-Mart stock is closest to:

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

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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