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

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. If the risk-free interest rate is 4% and the expected return from the market portfolio is 12%, then the expected return on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest to:

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:

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:

Use the table for the question(s) below. Consider the following covariances between securities: -What is the variance on a portfolio that has $3000 invested in Duke Energy, $4000 invested in Microsoft, and $3000 invested in Wal-Mart stock?

Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.

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

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 of your investment is closest to:

Use the table for the question(s) below. Consider the following returns: -The Volatility on Stock Z's returns is closest to:

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 is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?

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.

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:

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:

Which of the following statements is FALSE?

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock. You expect a return of 16% for Merck and 12% for Home Depot. What is the expected return on your portfolio?

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 Sharpe Ratio for the market portfolio is closest to:

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 12% and a volatility of 18%. Assume that the CAPM assumptions hold. -The volatility of the alternative investment that has the lowest possible volatility while having the same expected return as Google is closest to:

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:

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?

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 value stock portfolio is closest to: