Question 1

The dominant portfolio with the lowest possible risk measures is:

Accepted Answer

A)  the efficient frontier. 
B)  The minimum variance portfolio. 
C)  The upper tail of the efficient set. 
D)  The tangency portfolio. 
A)  the efficient frontier. 
B)  The minimum variance portfolio. 
C)  The upper tail of the efficient set. 
D)  The tangency portfolio. B

Question 2

You have plotted the data for two securities over time on the same graph, ie., the month return of each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have:

Accepted Answer

A)  no correlation at all. 
B)  a weak negative correlation. 
C)  a strong negative correlation. 
D)  a strong positive correlation. 
A)  no correlation at all. 
B)  a weak negative correlation. 
C)  a strong negative correlation. 
D)  a strong positive correlation. D

Question 3

The CML is the pricing relationship between:

Accepted Answer

A)  efficient portfolios and beta 
B)  the risk-free asset and standard deviation of the portfolio return 
C)  the optimal portfolio and the standard deviation of portfolio return 
D)  beta and the standard deviation of portfolio return 
A)  efficient portfolios and beta 
B)  the risk-free asset and standard deviation of the portfolio return 
C)  the optimal portfolio and the standard deviation of portfolio return 
D)  beta and the standard deviation of portfolio return C

Question 4

Given the following information on 3 stocks:
 
Using the CAPM, calculate the expected return for Stock's A, B, and C. Which stocks would you recommend purchasing?

Accepted Answer

@#IMG-DLM& 
Indifferent on A a

Question 5

If the correlation between two stocks is -1, the returns:

Accepted Answer

A)  generally move in the same direction 
B)  move perfectly opposite one another 
C)  are unrelated to one another as it is <0 
D)  have standard deviations of equal size but opposite signs 
A)  generally move in the same direction 
B)  move perfectly opposite one another 
C)  are unrelated to one another as it is <0 
D)  have standard deviations of equal size but opposite signs

Question 6

For a highly diversified equally weighted portfolio, the portfolio variance is:

Accepted Answer

A)  the average covariance. 
B)  the average expected value. 
C)  the average variance. 
D)  the weighted average expected value. 
E)  the weighted average variance. 
A)  the average covariance. 
B)  the average expected value. 
C)  the average variance. 
D)  the weighted average expected value. 
E)  the weighted average variance.

Question 7

Given the range of betas on actual companies reported in Table 11.7, a very low beta would be ___, and a very high beta would be _____ in comparison.

Accepted Answer

A)  1.00; 1.00 
B)  .86; .96 
C)  .22; 2.29 
D)  1.08; 1.08 
E)  .37; 1.58 
A)  1.00; 1.00 
B)  .86; .96 
C)  .22; 2.29 
D)  1.08; 1.08 
E)  .37; 1.58

Question 8

The diagram below represents an opportunity set for a two asset combination. Indicate the correct efficient set with labels; explain why it is so.

Accepted Answer

Efficient set is portion of op

Question 9

When a security is added to a portfolio the appropriate return and risk contributions are:

Accepted Answer

A)  the expected return of the asset and its standard deviation. 
B)  the most probable return and the beta. 
C)  the expected return and the beta. 
D)  the most probable return and its standard deviation. 
A)  the expected return of the asset and its standard deviation. 
B)  the most probable return and the beta. 
C)  the expected return and the beta. 
D)  the most probable return and its standard deviation.

Question 10

The elements along the diagonal of the Variance Covariance matrix are:

Accepted Answer

A)  covariance's. 
B)  security weights. 
C)  security selections. 
D)  variances. 
A)  covariance's. 
B)  security weights. 
C)  security selections. 
D)  variances.

Question 11

The separation principle states that an investor will:

Accepted Answer

A)  choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. 
B)  choose an efficient portfolio based on individual risk tolerance or utility. 
C)  never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. 
D)  invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance. 
A)  choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. 
B)  choose an efficient portfolio based on individual risk tolerance or utility. 
C)  never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. 
D)  invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance.

Question 12

You want your portfolio beta to be 1.20. Currently, your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of .6. You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset. How much should you invest in the risk-free asset?

Accepted Answer

A)  $0 
B)  $140 
C)  $200 
D)  $320 
A)  $0 
B)  $140 
C)  $200 
D)  $320

Question 13

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:

Accepted Answer

A)  the capital market line which shows that all investors will only invest in the riskless asset. 
B)  the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. 
C)  the security market line which shows that all investors will invest in the riskless asset only. 
D)  the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. 
A)  the capital market line which shows that all investors will only invest in the riskless asset. 
B)  the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. 
C)  the security market line which shows that all investors will invest in the riskless asset only. 
D)  the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.

Question 14

The variance and standard deviation of GenLabs returns are:

Accepted Answer

A)  428.75; 20.71 
B)  71.46; 8.45 
C)  939.58; 30.65 
D)  1127.50; 33.58 
A)  428.75; 20.71 
B)  71.46; 8.45 
C)  939.58; 30.65 
D)  1127.50; 33.58

Question 15

Which one of the following would indicate a portfolio is being effectively diversified?

Accepted Answer

A)  an increase in the portfolio beta 
B)  a decrease in the portfolio beta 
C)  an increase in the portfolio rate of return 
D)  a decrease in the portfolio standard deviation 
A)  an increase in the portfolio beta 
B)  a decrease in the portfolio beta 
C)  an increase in the portfolio rate of return 
D)  a decrease in the portfolio standard deviation

Question 16

Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

Accepted Answer

A)  20.0%. 
B)  4.0%. 
C)  12.0%. 
D)  Greater than 20%. 
A)  20.0%. 
B)  4.0%. 
C)  12.0%. 
D)  Greater than 20%.

Question 17

A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security D. Security C has an expected return of 8% and a standard deviation of 6. Security B has an expected return of 10% and a standard deviation of 10. The securities have a coefficient of correlation of .6. Which of the following values is closest to portfolio return and variance?

Accepted Answer

A)  .095; .001675. 
B)  .095; .0072. 
C)  .100; .00849. 
D)  .090; .0081. 
A)  .095; .001675. 
B)  .095; .0072. 
C)  .100; .00849. 
D)  .090; .0081.

Question 18

The variances of IS and DS are:

Accepted Answer

A)  .0145; .00038 
B)  .011584; .000304 
C)  .006454; .000154 
D)  .0008068; .000193 
A)  .0145; .00038 
B)  .011584; .000304 
C)  .006454; .000154 
D)  .0008068; .000193

Question 19

You've owned a share of stock for 6 years. It returned 5% in 3 of those years and -5% in the other 3. What was the variance?

Accepted Answer

A)  15. 
B)  150. 
C)  30. 
D)  0. 
A)  15. 
B)  150. 
C)  30. 
D)  0.

Question 20

A portfolio will usually contain:

Accepted Answer

A)  one riskless asset. 
B)  one risky asset. 
C)  two or more assets. 
D)  no assets. 
A)  one riskless asset. 
B)  one risky asset. 
C)  two or more assets. 
D)  no assets.

Exam 10: Risk and Return: Lessons From Market History

The dominant portfolio with the lowest possible risk measures is:

You have plotted the data for two securities over time on the same graph, ie., the month return of each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have:

The CML is the pricing relationship between:

Given the following information on 3 stocks: Using the CAPM, calculate the expected return for Stock's A, B, and C. Which stocks would you recommend purchasing?

If the correlation between two stocks is -1, the returns:

For a highly diversified equally weighted portfolio, the portfolio variance is:

Given the range of betas on actual companies reported in Table 11.7, a very low beta would be ___, and a very high beta would be _____ in comparison.

The diagram below represents an opportunity set for a two asset combination. Indicate the correct efficient set with labels; explain why it is so.

When a security is added to a portfolio the appropriate return and risk contributions are:

The elements along the diagonal of the Variance Covariance matrix are:

The separation principle states that an investor will:

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:

The variance and standard deviation of GenLabs returns are:

Which one of the following would indicate a portfolio is being effectively diversified?

Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

The variances of IS and DS are:

You've owned a share of stock for 6 years. It returned 5% in 3 of those years and -5% in the other 3. What was the variance?

A portfolio will usually contain:

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Given the range of betas on actual companies reported in Table 11.7, a very low beta would be _, and a very high beta would be ___ in comparison.