Question 1

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 stand 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 stand 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 2

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 expected return on his portfolio, then the amount that Tom should invest in the market portfolio to minimize his volatility is closest to:

Accepted Answer

A)  100% 
B)  90% 
C)  125% 
D)  110% 
A)  100% 
B)  90% 
C)  125% 
D)  110%

Question 3

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
  
-The expected return 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)  21% 
B)  12% 
C)  27% 
D)  18% 
A)  21% 
B)  12% 
C)  27% 
D)  18%

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 beta for the portfolio of the three stocks is closest to:

Accepted Answer

A)  0.92 
B)  0.94 
C)  1.00 
D)  1.02 
A)  0.92 
B)  0.94 
C)  1.00 
D)  1.02

Question 5

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 Lowes in your portfolio after one year is closest to:

Accepted Answer

A)  20.0% 
B)  34.8% 
C)  30.0% 
D)  36.0% 
A)  20.0% 
B)  34.8% 
C)  30.0% 
D)  36.0%

Question 6

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 7

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 8

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 9

Which of the following statements is FALSE?

Accepted Answer

A)  If we increase the fraction invested in the efficient portfolio beyond 100%m we are short selling the risk-free investment. 
B)  As we increase the fraction invested in the efficient portfolio, we increase our risk premium but not our risk proportionately. 
C)  To earn the highest possible expected return for any level of volatility we must find the portfolio that generates the steepest possible line when combined with the risk-free investment. 
D)  Every investor should invest in the tangent portfolio independent of his or her taste for risk. 
A)  If we increase the fraction invested in the efficient portfolio beyond 100%m we are short selling the risk-free investment. 
B)  As we increase the fraction invested in the efficient portfolio, we increase our risk premium but not our risk proportionately. 
C)  To earn the highest possible expected return for any level of volatility we must find the portfolio that generates the steepest possible line when combined with the risk-free investment. 
D)  Every investor should invest in the tangent portfolio independent of his or her taste for risk.

Question 10

What is the efficient frontier and how does it change when more stocks are used to construct portfolios?

Accepted Answer

The efficient portfolios are those portf

Question 11

Use the table for the question(s) below.
Consider the following covariances between securities:
  
-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 12

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 13

Use the table for the question(s) below.
Consider the following three individuals portfolios consisting of investments in four stocks:
  
-The beta on Paul's Portfolio is closest to:

Accepted Answer

A)  1.5 
B)  1.8 
C)  1.3 
D)  1.0 
A)  1.5 
B)  1.8 
C)  1.3 
D)  1.0

Question 14

Use the table for the question(s) below.
Consider the following covariances between securities:
  
-Which of the following statements is FALSE?

Accepted Answer

A)  Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier. 
B)  To arrive at the best possible set of risk and return opportunities, we should keep adding stocks until all investment opportunities are represented. 
C)  We say a portfolio is short those stocks that have negative portfolio weights. 
D)  Adding new investment opportunities allows for greater diversification and improves the efficient frontier. 
A)  Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier. 
B)  To arrive at the best possible set of risk and return opportunities, we should keep adding stocks until all investment opportunities are represented. 
C)  We say a portfolio is short those stocks that have negative portfolio weights. 
D)  Adding new investment opportunities allows for greater diversification and improves the efficient frontier.

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 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 16

Which of the following statements is FALSE?

Accepted Answer

A)  The covariance and correlation allow us to measure the co-movement of returns. 
B)  Correlation is the expected product of the deviations of two returns. 
C)  Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio. 
D)  The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together. 
A)  The covariance and correlation allow us to measure the co-movement of returns. 
B)  Correlation is the expected product of the deviations of two returns. 
C)  Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio. 
D)  The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

Question 17

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 18

Use the table for the question(s) below.
Consider the following returns:
  
-Calculate the covariance between Stock Y's and Stock Z's returns .

Accepted Answer

The answer of Use the table for the question(s) below.
Consider...

Question 19

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 statements is FALSE?

Accepted Answer

A)  Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities. 
B)  In the real world investors have different information and expectations regarding securities. 
C)  The SML is still valid when interest rates differ. 
D)  When borrowing and lending occur at different rates there are different tangent portfolios identified. 
A)  Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities. 
B)  In the real world investors have different information and expectations regarding securities. 
C)  The SML is still valid when interest rates differ. 
D)  When borrowing and lending occur at different rates there are different tangent portfolios identified.

Question 20

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%

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 expected returns, volatilities, and correlations: -The expected return 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:

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 beta for the portfolio of the three stocks 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 on Lowes in your portfolio after one year is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

What is the efficient frontier and how does it change when more stocks are used to construct portfolios?

Use the table for the question(s) below. Consider the following covariances between securities: -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: -The beta on Paul's Portfolio is closest to:

Use the table for the question(s) below. Consider the following covariances between securities: -Which of the following statements is FALSE?

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:

Which of the following statements is FALSE?

Use the table for the question(s) below. Consider the following returns: -Calculate the covariance between Stock Y's and Stock Z's returns .

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:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Estimating the Cost of Capital

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

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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