Question 1

Given a portfolio of 50 shares,how many variance and unique covariance terms can be estimated using the Markowitz approach?

Accepted Answer

A)  50 variances; 1225 covariances 
B)  50 variances; 1250 covariances 
C)  49 variances; 1200 covariances 
D)  49 variances; 780 covariances 
A)  50 variances; 1225 covariances 
B)  50 variances; 1250 covariances 
C)  49 variances; 1200 covariances 
D)  49 variances; 780 covariances A

Question 2

$\begin{array}{|l|l|l|l|l|}
\hline \text { Investment } & \text { A } && \text { B } \
\hline \text { State description } & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.25 & 0.75 & 0.25 & 0.75 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-Assume the information in the table regarding the probability and payoffs of assets A and B relates to an investor who has a log utility function.What is the expected utility of asset B?

Accepted Answer

A)  $ 5.991 $ 
B)  $ 6.054 $ 
C)  $ 6.075 $ 
D)  $ 6.122 $ 
A)  $ 5.991 $ 
B)  $ 6.054 $ 
C)  $ 6.075 $ 
D)  $ 6.122 $ B

Question 3

$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { Investiment } A$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { Investment } B$
$\begin{array}{|l|l|l|l|l|}
\hline & \text { Good year } & \text { Bad year } & \text { Good year } & \text { Bad year } \
\hline \text { Probability } & 0.80 & 0.2 & 0.90 & 0.1 \
\hline \text { Pay-off } & 140 & 45 & 110 & 70 \
\hline
\end{array}$
-The key factor in asset choice is the effect of the additional asset on the existing portfolio.To calculate the change in portfolio variance and expected return with an additional asset,what does the investor require?

Accepted Answer

A)  Expected return of the new asset 
B)  Its variance 
C)  The covariance between the new asset and the other assets in the existing portfolio 
D)  All of these choices 
A)  Expected return of the new asset 
B)  Its variance 
C)  The covariance between the new asset and the other assets in the existing portfolio 
D)  All of these choices D

Question 4

$\text { Investment }$  $  \quad $$  \quad $$  \quad $$  \quad $$\text { A }$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { B }$
$\begin{array}{|l|l|l|l|l|}
\hline\
\begin{array}{l}
\text { State } \
\text { description }
\end{array} & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.5 & 0.5 & 0.5 & 0.5 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-The share market is currently returning 14% p.a. ,while the risk-free asset return is 6%.If an investor wishes to earn a return of 10%,what weight should the investor hold in the risk-free asset?

Accepted Answer

A)  $ 0.400 $ 
B)  $ 0.500 $ 
C)  $ 0.600 $ 
D)  $ 0.667 $ 
A)  $ 0.400 $ 
B)  $ 0.500 $ 
C)  $ 0.600 $ 
D)  $ 0.667 $

Question 5

Which of the following is typically used as a proxy for a risk-free asset?

Accepted Answer

A)  Corporate Bond 
B)  Consumer Price Index 
C)  All-Ordinaries 
D)  None of these choices 
A)  Corporate Bond 
B)  Consumer Price Index 
C)  All-Ordinaries 
D)  None of these choices

Question 6

Which of the following are properties required to define Von Neumann-Morgenstern utility?

Accepted Answer

A)  dependence of rankings 
B)  non-transitivity 
C)  ranking of alternatives 
D)  none of the above 
A)  dependence of rankings 
B)  non-transitivity 
C)  ranking of alternatives 
D)  none of the above

Question 7

$\text { Investment }$  $  \quad $$  \quad $$  \quad $$  \quad $$\text { A }$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { B }$
$\begin{array}{|l|l|l|l|l|}
\hline\
\begin{array}{l}
\text { State } \
\text { description }
\end{array} & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.5 & 0.5 & 0.5 & 0.5 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-The share market is currently returning 18% p.a. ,while the risk-free asset return is 6%.If an investor wishes to earn a return of 22%,what weight should the investor hold in the risk-free asset?

Accepted Answer

A)  $ -0.667 $ 
B)  $ -0.333 $ 
C)  $ -0.250 $ 
D)  $ 0.000 $ 
A)  $ -0.667 $ 
B)  $ -0.333 $ 
C)  $ -0.250 $ 
D)  $ 0.000 $

Question 8

$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { Investiment } A$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { Investment } B$
$\begin{array}{|l|l|l|l|l|}
\hline & \text { Good year } & \text { Bad year } & \text { Good year } & \text { Bad year } \
\hline \text { Probability } & 0.80 & 0.2 & 0.90 & 0.1 \
\hline \text { Pay-off } & 140 & 45 & 110 & 70 \
\hline
\end{array}$
-Given the above information,what is the expected utility for investment B?

Accepted Answer

A)  $ 4.4628 $ 
B)  $ 4.6550 $ 
C)  $ 4.6930 $
D $ 4.9987 $ 
A)  $ 4.4628 $ 
B)  $ 4.6550 $ 
C)  $ 4.6930 $
D $ 4.9987 $

Question 9

$\text { Investment }$  $  \quad $$  \quad $$  \quad $$  \quad $$\text { A }$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { B }$
$\begin{array}{|l|l|l|l|l|}
\hline\
\begin{array}{l}
\text { State } \
\text { description }
\end{array} & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.5 & 0.5 & 0.5 & 0.5 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-Assume the information in the table regarding the probability and payoffs of assets A and B relates to an investor that has a log utility function.By how much will the utility of asset B exceed that of asset A for this investor?

Accepted Answer

A)  $ -0.712 $ 
B)  $ -0.687 $ 
C)  $ 0.687 $ 
D)  $ 0.712 $ 
A)  $ -0.712 $ 
B)  $ -0.687 $ 
C)  $ 0.687 $ 
D)  $ 0.712 $

Question 10

$\text { Investment }$  $  \quad $$  \quad $$  \quad $$  \quad $$\text { A }$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { B }$
$\begin{array}{|l|l|l|l|l|}
\hline\
\begin{array}{l}
\text { State } \
\text { description }
\end{array} & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.5 & 0.5 & 0.5 & 0.5 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-Assume an investor has log utility.The investor faces a choice between an asset with a utility of 6.250 and an investment that will pay $500 in a bad state and $525 in a good state (as there are only two possible future states).What does the probability of the good state need to be for the investor to be indifferent between the assets?

Accepted Answer

A)  $ 0.271 $ 
B)  $ 0.306 $ 
C)  $ 0.704 $ 
D)  $ 0.729 $ 
A)  $ 0.271 $ 
B)  $ 0.306 $ 
C)  $ 0.704 $ 
D)  $ 0.729 $

Question 11

$\begin{array}{|l|l|l|l|l|}
\hline \text { Investment } & \text { A } && \text { B } \
\hline \text { State description } & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.20 & 0.80 & 0.30 & 0.70 \
\hline \text { Payoff } & 180 & 280 & 350 & ? ? \
\hline
\end{array}$
-Assume the information in the table regarding the probability and payoffs of assets A and B relates to an investor who has a log utility function.What does the payoff for asset B need to be in the good state to make the investor indifferent between the two assets?

Accepted Answer

A)  $ \$ 115.05 $ 
B)  $ \$ 147.69 $ 
C)  $ \$ 224.53 $ 
D)  $ \$ 417.25 $ 
A)  $ \$ 115.05 $ 
B)  $ \$ 147.69 $ 
C)  $ \$ 224.53 $ 
D)  $ \$ 417.25 $

Question 12

The typical Von Neumann-Morgenstern utility is convex.

Accepted Answer

A) True 
 B)False

Question 13

The opportunity set between two assets will be a curve rather than a straight line when the correlation is between -1 and 1.

Accepted Answer

A) True 
 B)False

Question 14

Transitivity is one of the five important assumptions of the expected utility model.

Accepted Answer

A) True 
 B)False

Question 15

Arbitrage profits are generally defined to exist in situations where there are positive returns to be made from investments that have:

Accepted Answer

A)  no-risk and zero gross investment 
B)  high-risk and zero gross investment 
C)  no-risk and zero net investment 
D)  high-risk and zero net investment 
A)  no-risk and zero gross investment 
B)  high-risk and zero gross investment 
C)  no-risk and zero net investment 
D)  high-risk and zero net investment

Question 16

An investor wishes to earn a portfolio with a standard deviation of 5%,by placing funds in the risk-free and risky asset portfolios.If the risky asset portfolio has a standard deviation and return of 10% and 5% respectively,calculate the weight that needs to be invested in the risky asset to achieve a standard deviation of 5%.

Accepted Answer

A)  $ 20 \% $ 
B)  $ 40 \% $ 
C)  $ 50 \% $ 
D)  $ 75 \% $ 
A)  $ 20 \% $ 
B)  $ 40 \% $ 
C)  $ 50 \% $ 
D)  $ 75 \% $

Question 17

$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { Investiment } A$   $  \quad $$  \quad $$  \quad $$  \quad $$  \quad $$\text { Investment } B$
$\begin{array}{|l|l|l|l|l|}
\hline & \text { Good year } & \text { Bad year } & \text { Good year } & \text { Bad year } \
\hline \text { Probability } & 0.80 & 0.2 & 0.90 & 0.1 \
\hline \text { Pay-off } & 140 & 45 & 110 & 70 \
\hline
\end{array}$
-Given the above information,what is the expected utility for investment A?

Accepted Answer

A)  $ 4.7140 $ 
B)  $ 4.7749 $ 
C)  $ 4.6930 $ 
D)  $ 4.8147 $ 
A)  $ 4.7140 $ 
B)  $ 4.7749 $ 
C)  $ 4.6930 $ 
D)  $ 4.8147 $

Question 18

$\begin{array}{|l|l|l|l|l|}
\hline \text { Investment } & \text { A } && \text { B } \
\hline \text { State description } & \text { Bad state } & \text { Good state } & \text { Bad state } & \text { Good state } \
\hline \text { Probability } & 0.25 & 0.75 & 0.25 & 0.75 \
\hline \text { Payoff } & 200 & 220 & 400 & 435 \
\hline
\end{array}$
-Assume the information in the table regarding the probability and payoffs of assets A and B relates to an investor who has a log utility function.By how much will the utility of asset B exceed that of asset A for this investor?

Accepted Answer

A)  $ -0.712 $ 
B)  $ -0.687 $ 
C)  $ 0.684 $ 
D)  $ 0.712 $ 
A)  $ -0.712 $ 
B)  $ -0.687 $ 
C)  $ 0.684 $ 
D)  $ 0.712 $

Question 19

As the number of assets increases,the variance of an equally weighted portfolio approaches the average covariance.

Accepted Answer

A) True 
 B)False

Question 20

The slope coefficient from the market model can be used as an estimate of the risk-free rate.

Accepted Answer

A) True 
 B)False

Given a portfolio of 50 shares,how many variance and unique covariance terms can be estimated using the Markowitz approach?

Which of the following is typically used as a proxy for a risk-free asset?

Which of the following are properties required to define Von Neumann-Morgenstern utility?

The typical Von Neumann-Morgenstern utility is convex.

The opportunity set between two assets will be a curve rather than a straight line when the correlation is between -1 and 1.

Transitivity is one of the five important assumptions of the expected utility model.

Arbitrage profits are generally defined to exist in situations where there are positive returns to be made from investments that have:

As the number of assets increases,the variance of an equally weighted portfolio approaches the average covariance.

The slope coefficient from the market model can be used as an estimate of the risk-free rate.

The Investment Decision

Australian Financial Markets

The International Investment Environment

Financial Management: Derivative Instruments and Information Sources

Money Market Securities

Bonds

Risky Asset Pricing Models and the Capm

Alternative Risky Asset Pricing Models

Concepts and Applications of Market Efficiency

Equity Valuation Models

Macro- and Industry Analysis of Share Markets

Qualitative Stock Selection

Quantitative Company Analysis

Futures and Forward Contracts

Option Contracts

Advanced Issues in Options

Alternative Investments

Portfolio Management

Performance Evaluation of Managed Funds

Filters

Exam 7: Investor Preferences and Portfolio Concepts

Given a portfolio of 50 shares,how many variance and unique covariance terms can be estimated using the Markowitz approach?

Which of the following is typically used as a proxy for a risk-free asset?

Which of the following are properties required to define Von Neumann-Morgenstern utility?

The typical Von Neumann-Morgenstern utility is convex.

The opportunity set between two assets will be a curve rather than a straight line when the correlation is between -1 and 1.

Transitivity is one of the five important assumptions of the expected utility model.

Arbitrage profits are generally defined to exist in situations where there are positive returns to be made from investments that have:

As the number of assets increases,the variance of an equally weighted portfolio approaches the average covariance.

The slope coefficient from the market model can be used as an estimate of the risk-free rate.

The Investment Decision

Australian Financial Markets

The International Investment Environment

Financial Management: Derivative Instruments and Information Sources

Money Market Securities

Bonds

Risky Asset Pricing Models and the Capm

Alternative Risky Asset Pricing Models

Concepts and Applications of Market Efficiency

Equity Valuation Models

Macro- and Industry Analysis of Share Markets

Qualitative Stock Selection

Quantitative Company Analysis

Futures and Forward Contracts

Option Contracts

Advanced Issues in Options

Alternative Investments

Portfolio Management

Performance Evaluation of Managed Funds

Filters