Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Because all other risk is diversifiable,it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk,and therefore determines its cost of capital. 
B) If a security's expected return exceeds its required return given our current portfolio,then we can improve the performance of our portfolio by adding more of the security. 
C) The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. 
D) As we buy shares of a security i,its correlation with our portfolio P will increase,ultimately raising its required return until E[Ri] = Rp. 
A) Because all other risk is diversifiable,it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk,and therefore determines its cost of capital. 
B) If a security's expected return exceeds its required return given our current portfolio,then we can improve the performance of our portfolio by adding more of the security. 
C) The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. 
D) As we buy shares of a security i,its correlation with our portfolio P will increase,ultimately raising its required return until E[Ri] = Rp.

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%.
-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:

Accepted Answer

A) 1.06 
B) 1.14 
C) 1.19 
D) 1.24 
A) 1.06 
B) 1.14 
C) 1.19 
D) 1.24

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) The market portfolio is the efficient portfolio. 
B) Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C) If we plot individual securities according to their expected return and beta,the CAPM implies that they should all fall along the CML. 
D) As savvy investors attempt to trade to improve their portfolios,they raise the price and lower the expected return of the positive alpha stocks,and they depress the price and raise the expected return of negative alpha stocks,until the stocks are once again on the security market line and the market portfolio is efficient. 
A) The market portfolio is the efficient portfolio. 
B) Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital. 
C) If we plot individual securities according to their expected return and beta,the CAPM implies that they should all fall along the CML. 
D) As savvy investors attempt to trade to improve their portfolios,they raise the price and lower the expected return of the positive alpha stocks,and they depress the price and raise the expected return of negative alpha stocks,until the stocks are once again on the security market line and the market portfolio is efficient.

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) We say a portfolio is long those stocks that have negative portfolio weights. 
B) The efficient portfolios are those portfolios offering the highest possible expected return for a given level of volatility. 
C) When two stocks are perfectly negatively correlated,it becomes possible to hold a portfolio that bears absolutely no risk. 
D) The lower the correlation of the securities in a portfolio the lower the volatility we can obtain. 
A) We say a portfolio is long those stocks that have negative portfolio weights. 
B) The efficient portfolios are those portfolios offering the highest possible expected return for a given level of volatility. 
C) When two stocks are perfectly negatively correlated,it becomes possible to hold a portfolio that bears absolutely no risk. 
D) The lower the correlation of the securities in a portfolio the lower the volatility we can obtain.

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 return on your portfolio over the year is:

Accepted Answer

A) 0% 
B) 7.5% 
C) 3.5% 
D) 5.0% 
A) 0% 
B) 7.5% 
C) 3.5% 
D) 5.0%

Question 6

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 7

Which of the following statements is FALSE?

Accepted Answer

A) If two stocks move in opposite directions,one will tend to be above average when to other is below average,and the covariance will be negative. 
B) The correlation between two stocks has the same sign as their covariance,so it has a similar interpretation. 
C) The covariance of a stock with itself is simply its variance. 
D) The covariance allows us to gauge the strength of the relationship between stocks. 
A) If two stocks move in opposite directions,one will tend to be above average when to other is below average,and the covariance will be negative. 
B) The correlation between two stocks has the same sign as their covariance,so it has a similar interpretation. 
C) The covariance of a stock with itself is simply its variance. 
D) The covariance allows us to gauge the strength of the relationship between stocks.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) Stock returns will tend to move together if they are affected 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 invested 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 affected 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 invested in each stock,the more the stocks move together and the higher their covariance or correlation,the more variable the portfolio will be.

Question 9

The weight on Ball Corporation in your portfolio is:

Accepted Answer

A) 50% 
B) 40% 
C) 20% 
D) 30% 
A) 50% 
B) 40% 
C) 20% 
D) 30%

Question 10

Assume that the EFT you invested in returns -10%,then the realized return on your investment is closest to:

Accepted Answer

A) -20% 
B) -10% 
C) -24% 
D) -26% 
A) -20% 
B) -10% 
C) -24% 
D) -26%

Question 11

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 12

Which of the following statements is FALSE?

Accepted Answer

A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B) We can rule out inefficient portfolios because they represent inferior investment choices. 
C) The volatility of the portfolio will differ,depending on the correlation between the securities in the portfolio. 
D) Correlation has no effect on the expected return on a portfolio. 
A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B) We can rule out inefficient portfolios because they represent inferior investment choices. 
C) The volatility of the portfolio will differ,depending on the correlation between the securities in the portfolio. 
D) Correlation has no effect on the expected return on a portfolio.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) The Sharpe ratio of the portfolio tells us how much our expected return will increase for a given increase in volatility. 
B) We should continue to trade securities until the expected return of each security equals its required return. 
C) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. 
D) If security i's required return exceeds its expected return,then adding more of it will improve the performance of the portfolio. 
A) The Sharpe ratio of the portfolio tells us how much our expected return will increase for a given increase in volatility. 
B) We should continue to trade securities until the expected return of each security equals its required return. 
C) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. 
D) If security i's required return exceeds its expected return,then adding more of it will improve the performance of the portfolio.

Question 14

How is the optimal portfolio choice affected if there are different rates for borrowers and savers?

Accepted Answer

Borrowers will select one risky portfoli

Question 15

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

Accepted Answer

A) 35% 
B) 10% 
C) 13% 
D) 42% 
A) 35% 
B) 10% 
C) 13% 
D) 42%

Question 16

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

Accepted Answer

A) 0.58 
B) 0.29 
C) 0.69 
D) 0.10 
A) 0.58 
B) 0.29 
C) 0.69 
D) 0.10

Question 17

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 18

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

Accepted Answer

A) 12.0% 
B) 13.5% 
C) 15.0% 
D) 19.0% 
A) 12.0% 
B) 13.5% 
C) 15.0% 
D) 19.0%

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) Because all investors should hold the risky securities in the same proportions as the efficient portfolio,their combined portfolio will also reflect the same proportions as the efficient portfolio. 
B) When the CAPM assumptions hold,choosing an optimal portfolio is relatively straightforward: it is the combination of the risk-free investment and the market portfolio. 
C) Graphically,when the tangent line goes through the market portfolio,it is called the security market line (SML). 
D) A portfolio's risk premium and volatility are determined by the fraction that is invested in the market. 
A) Because all investors should hold the risky securities in the same proportions as the efficient portfolio,their combined portfolio will also reflect the same proportions as the efficient portfolio. 
B) When the CAPM assumptions hold,choosing an optimal portfolio is relatively straightforward: it is the combination of the risk-free investment and the market portfolio. 
C) Graphically,when the tangent line goes through the market portfolio,it is called the security market line (SML). 
D) A portfolio's risk premium and volatility are determined by the fraction that is invested in the market.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) The volatility declines as the number of stocks in a portfolio grows. 
B) An equally weighted portfolio is a portfolio in which the same amount is invested in each stock. 
C) As the number of stocks in a portfolio grows large,the variance of the portfolio is determined primarily by the average covariance among the stocks. 
D) When combining stocks into a portfolio that puts positive weight on each stock,unless all of the stocks are uncorrelated with the portfolio,the risk of the portfolio will be lower than the weighted average volatility of the individual stocks. 
A) The volatility declines as the number of stocks in a portfolio grows. 
B) An equally weighted portfolio is a portfolio in which the same amount is invested in each stock. 
C) As the number of stocks in a portfolio grows large,the variance of the portfolio is determined primarily by the average covariance among the stocks. 
D) When combining stocks into a portfolio that puts positive weight on each stock,unless all of the stocks are uncorrelated with the portfolio,the risk of the portfolio will be lower than the weighted average volatility of the individual stocks.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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 return on your portfolio over the year is:

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?

Which of the following statements is FALSE?

The weight on Ball Corporation in your portfolio is:

Assume that the EFT you invested in returns -10%,then the realized return on your investment is closest to:

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

How is the optimal portfolio choice affected if there are different rates for borrowers and savers?

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

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

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:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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 return on your portfolio over the year is:

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?

Which of the following statements is FALSE?

The weight on Ball Corporation in your portfolio is:

Assume that the EFT you invested in returns -10%,then the realized return on your investment is closest to:

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

How is the optimal portfolio choice affected if there are different rates for borrowers and savers?

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

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

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:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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