Question 1

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

Accepted Answer

A) Investors have homogeneous expectations regarding the volatilities,correlation,and expected returns of securities. 
B) Investors have homogeneous risk adverse preferences toward taking on risk. 
C) Investors hold only efficient portfolios of traded securities,that is portfolios that yield the maximum expected return for the given level of volatility. 
D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate. 
A) Investors have homogeneous expectations regarding the volatilities,correlation,and expected returns of securities. 
B) Investors have homogeneous risk adverse preferences toward taking on risk. 
C) Investors hold only efficient portfolios of traded securities,that is portfolios that yield the maximum expected return for the given level of volatility. 
D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.

Question 2

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:

Accepted Answer

A) 0.40 
B) 0.48 
C) 0.56 
D) 0.80 
A) 0.40 
B) 0.48 
C) 0.56 
D) 0.80

Question 3

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 lowest possible volatility while having the same expected return as Wal-Mart? What is the volatility of this portfolio?

Accepted Answer

E[R_xCML] = r_f + x(E[R_Mkt] - r_f) .14 = .

Question 4

Use the table for the question(s)below.
Consider the following returns:
  
-The covariance between Stock X's and Stock Z's returns is closest to:

Accepted Answer

A) 0.05 
B) 0.06 
C) 0.10 
D) 0.71 
A) 0.05 
B) 0.06 
C) 0.10 
D) 0.71

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) The tangent portfolio is efficient and that,once we include the risk-free investment,all efficient portfolios are combinations of the risk-free investment and the tangent portfolio. 
B) The optimal portfolio of risky investments depends on how conservative or aggressive the investor is. 
C) By combining the efficient portfolio with the risk-free investment,an investor will earn the highest possible expected return for any level of volatility her or she is willing to bear. 
D) The efficient portfolio is the tangent portfolio,the portfolio with the highest Sharpe ratio in the economy. 
A) The tangent portfolio is efficient and that,once we include the risk-free investment,all efficient portfolios are combinations of the risk-free investment and the tangent portfolio. 
B) The optimal portfolio of risky investments depends on how conservative or aggressive the investor is. 
C) By combining the efficient portfolio with the risk-free investment,an investor will earn the highest possible expected return for any level of volatility her or she is willing to bear. 
D) The efficient portfolio is the tangent portfolio,the portfolio with the highest Sharpe ratio in the economy.

Question 7

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 8

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 volatility on the market portfolio (which is a 50-50 combination of the value and growth portfolios)is closest to:

Accepted Answer

A) 13.5% 
B) 15.2% 
C) 17.1% 
D) 19.0% 
A) 13.5% 
B) 15.2% 
C) 17.1% 
D) 19.0%

Question 9

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

Accepted Answer

b_Monsters = @#IMG-DLM& = @#IMG-DLM& = .66667 r_i =

Question 10

Which of the following equations is INCORRECT?

Accepted Answer

A) xi =   
B) Rp = Σi xiRi 
C) Rp = x1R1 + x2R2 + ...+ xnRn 
D) E[Rp] = E[Σi xiRi] 
A) xi =   
B) Rp = Σi xiRi 
C) Rp = x1R1 + x2R2 + ...+ xnRn 
D) E[Rp] = E[Σi xiRi]

Question 11

Use the table for the question(s)below.
Consider the following returns:
  
-The variance on a portfolio that is made up of equal investments in Stock X and Stock Z is closest to:

Accepted Answer

A) 0.62 
B) 0.05 
C) 0.12 
D) 0.06 
A) 0.62 
B) 0.05 
C) 0.12 
D) 0.06

Question 12

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?

Accepted Answer

Variance o

Question 13

Suppose that Monsters' expected return is 12%.Then Monsters' alpha is closest to:

Accepted Answer

A) -2.0% 
B) -1.0% 
C) 1.0% 
D) 0.5% 
A) -2.0% 
B) -1.0% 
C) 1.0% 
D) 0.5%

Question 14

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 15

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 Wyatt Oil is closest to:

Accepted Answer

A) 0.75 
B) 0.80 
C) 1.00 
D) 1.10 
A) 0.75 
B) 0.80 
C) 1.00 
D) 1.10

Question 16

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:

Accepted Answer

A) .53 
B) .58 
C) .61 
D) .79 
A) .53 
B) .58 
C) .61 
D) .79

Question 17

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 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 the...

Question 19

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 20

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) .17 
B) .03 
C) .41 
D) .19 
A) .17 
B) .03 
C) .41 
D) .19

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

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 table for the question(s)below. Consider the following returns: -The covariance between Stock X's and Stock Z's returns 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?

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:

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

Which of the following equations is INCORRECT?

Use the table for the question(s)below. Consider the following returns: -The variance on a portfolio that is made up of equal investments in Stock X and Stock Z 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?

Suppose that Monsters' expected return is 12%.Then Monsters' alpha is closest to:

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:

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 Wyatt Oil is closest to:

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 .

Which of the following statements is FALSE?

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:

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

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

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

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 table for the question(s)below. Consider the following returns: -The covariance between Stock X's and Stock Z's returns 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?

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:

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

Which of the following equations is INCORRECT?

Use the table for the question(s)below. Consider the following returns: -The variance on a portfolio that is made up of equal investments in Stock X and Stock Z 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?

Suppose that Monsters' expected return is 12%.Then Monsters' alpha is closest to:

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:

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 Wyatt Oil is closest to:

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 .

Which of the following statements is FALSE?

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:

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

Filters