Question 1

Which of the following statements is false?

Accepted Answer

A)  The Sharpe ratio of 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 of 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 2

Which of the following statements is false?

Accepted Answer

A)  Because all other risk is diversifiable, it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk, and therefore determines its cost of capital. 
B)  If a security's expected return exceeds its required return given our current portfolio, then we can improve the performance of our portfolio by adding more of the security. 
C)  The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. 
D)  As we buy shares of a security i, its correlation with our portfolio P will increase, ultimately raising its required return until E[Ri] = Rp. 
A)  Because all other risk is diversifiable, it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk, and therefore determines its cost of capital. 
B)  If a security's expected return exceeds its required return given our current portfolio, then we can improve the performance of our portfolio by adding more of the security. 
C)  The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. 
D)  As we buy shares of a security i, its correlation with our portfolio P will increase, ultimately raising its required return until E[Ri] = Rp.

Question 3

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 4

Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[Ri] ________ the required return given portfolio P defined as in Formula (11.20)

Accepted Answer

A)  decrease; exceeds 
B)  increase; exceeds 
C)  increase; goes below 
D)  none of the above 
A)  decrease; exceeds 
B)  increase; exceeds 
C)  increase; goes below 
D)  none of the above

Question 5

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 Canadian 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 6

The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face ________ risks and their prices move together.

Accepted Answer

A)  common 
B)  independent 
C)  firm-specific 
D)  unique 
A)  common 
B)  independent 
C)  firm-specific 
D)  unique

Question 7

By combining stocks into a portfolio,we reduce risk through

Accepted Answer

A)  higher expected return. 
B)  higher rate of return. 
C)  higher average return. 
D)  diversification. 
A)  higher expected return. 
B)  higher rate of return. 
C)  higher average return. 
D)  diversification.

Question 8

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

Accepted Answer

A)  35% 
B)  31% 
C)  42% 
D)  18% 
A)  35% 
B)  31% 
C)  42% 
D)  18%

Question 9

Which of the following statements is false?

Accepted Answer

A)  Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. 
B)  The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. 
C)  Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. 
D)  A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio. 
A)  Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. 
B)  The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. 
C)  Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. 
D)  A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

Question 10

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

Accepted Answer

A)  0.065 
B)  0.090 
C)  0.149 
D)  -0.020 
A)  0.065 
B)  0.090 
C)  0.149 
D)  -0.020

Question 11

Which of the following statements is false?

Accepted Answer

A)  We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B)  We can rule out inefficient portfolios because they represent inferior investment choices. 
C)  The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. 
D)  Correlation has no effect on the expected return on a portfolio. 
A)  We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B)  We can rule out inefficient portfolios because they represent inferior investment choices. 
C)  The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. 
D)  Correlation has no effect on the expected return on a portfolio.

Question 12

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 13

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:

Accepted Answer

A)  8% 
B)  9% 
C)  11% 
D)  6% 
A)  8% 
B)  9% 
C)  11% 
D)  6%

Question 14

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.
-The volatility of your investment is closest to:

Accepted Answer

A)  40% 
B)  20% 
C)  30% 
D)  24% 
A)  40% 
B)  20% 
C)  30% 
D)  24%

Question 15

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 of 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 16

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 required return for Sisyphean's new project is closest to:

Accepted Answer

A)  24% 
B)  14% 
C)  18% 
D)  10% 
A)  24% 
B)  14% 
C)  18% 
D)  10%

Question 17

Consider an equally weighted portfolio that contains five stocks.If the average volatility of these stocks is 40% and the average correlation between the stocks is .5,then the volatility of this equally weighted portfolio is closest to:

Accepted Answer

A)  0.17 
B)  0.44 
C)  0.41 
D)  0.19 
A)  0.17 
B)  0.44 
C)  0.41 
D)  0.19

Question 18

Which of the following statements is false?

Accepted Answer

A)  A portfolio is efficient if it has the highest possible Sharpe ratio; that is, it is efficient if it provides the largest increase in expected return possible for a given increase in volatility. 
B)  The required return for an investment is equal to a risk premium that is equal to the risk premium of the investor's current portfolio scaled by   . 
C)  Increasing the investment in investment I will increase the Sharpe ratio of portfolio P if its expected return E[Ri] exceeds the required return ri, which is given by ri = rf +   × (E[Rp] - rf). 
D)  If a security i's expected return is less than the required return ri, we should reduce our holding of security i. 
A)  A portfolio is efficient if it has the highest possible Sharpe ratio; that is, it is efficient if it provides the largest increase in expected return possible for a given increase in volatility. 
B)  The required return for an investment is equal to a risk premium that is equal to the risk premium of the investor's current portfolio scaled by   . 
C)  Increasing the investment in investment I will increase the Sharpe ratio of portfolio P if its expected return E[Ri] exceeds the required return ri, which is given by ri = rf +   × (E[Rp] - rf). 
D)  If a security i's expected return is less than the required return ri, we should reduce our holding of security i.

Question 19

Which of the following statements is false?

Accepted Answer

A)  The expected return of a portfolio is equal to the weighted average expected return, but the volatility of a portfolio is less than the weighted average volatility. 
B)  Each security contributes to the volatility of the portfolio according to its volatility, scaled by its covariance with the portfolio, which adjusts for the fraction of the total risk that is common to the portfolio. 
C)  Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification. 
D)  The overall variability of the portfolio depends on the total co-movement of the stocks within it. 
A)  The expected return of a portfolio is equal to the weighted average expected return, but the volatility of a portfolio is less than the weighted average volatility. 
B)  Each security contributes to the volatility of the portfolio according to its volatility, scaled by its covariance with the portfolio, which adjusts for the fraction of the total risk that is common to the portfolio. 
C)  Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification. 
D)  The overall variability of the portfolio depends on the total co-movement of the stocks within it.

Question 20

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.

Accepted Answer

A)  the realized return 
B)  the highest return 
C)  the lowest return 
D)  the expected return 
A)  the realized return 
B)  the highest return 
C)  the lowest return 
D)  the expected return

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?

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

Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[Ri] ________ the required return given portfolio P defined as in Formula (11.20)

The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face ________ risks and their prices move together.

By combining stocks into a portfolio,we reduce risk through

Use the table for the question(s) below. Consider the following returns: -The volatility on Home Depot's returns 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 equal investments in Duke Energy and Microsoft stock is closest to:

Which of the following statements is false?

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:

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 of Abbott Labs in your portfolio after one year is closest to:

Consider an equally weighted portfolio that contains five stocks.If the average volatility of these stocks is 40% and the average correlation between the stocks is .5,then the volatility of this equally weighted portfolio is closest to:

Which of the following statements is false?

Which of the following statements is false?

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

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

Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[R_i] ________ the required return given portfolio P defined as in Formula (11.20)