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

Question 1

Which of the following statements is FALSE?

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.

Answer 1

Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.

Question 2

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.
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:

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

Answer 2

34.8%

Question 3

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.
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:

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

Answer 3

3.5%

Question 4

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 Abbott Labs in your portfolio is:

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

Question 5

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.
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 Abbott Labs in your portfolio after one year is closest to:

A)-10.0%
B)43.5%
C)45.0%
D)50.0%

Question 6

Which of the following statements is FALSE?

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 7

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.
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:

A)$21,000
B)$20,000
C)$20,700
D)$21,500

Question 8

Which of the following equations is INCORRECT?

A)x_i =
B)R_p = Σ_i x_iR_i
C)R_p = x₁R₁ + x₂R₂ + ... + x_nR_n
D)E[R_p] = E[Σ_i x_iR_i]

Question 9

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.
Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock. You receive an actual return of -8% for Merck and 12% for Home Depot. What is the actual return on your portfolio?

A)4.50%
B)4.00%
C)10.00%
D)2.00%

Question 10

Which of the following statements is FALSE?

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 11

Which of the following statements is FALSE?

A)While the sign of the correlation is easy to interpret, its magnitude is not.
B)Independent risks are uncorrelated.
C)When the covariance equals 0, the returns are uncorrelated.
D)To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together.

Question 12

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.
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 Ball Corporation in your portfolio after one year is closest to:

A)20.0%
B)12.5%
C)20.7%
D)21.7%

Question 13

Which of the following statements is FALSE?

A)Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1.
B)Volatility is the square root of variance.
C)The closer the correlation is to 0, the more the returns tend to move together as a result of common risk.
D)If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive.

Question 14

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 Ball Corporation in your portfolio is:

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

Question 15

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:

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

Question 16

Which of the following statements is FALSE?

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 17

Which of the following equations is INCORRECT?

A)Cov(R_i,R_j)= Σ(R_i - R_i)(R_j - R_j)
B)Var(R_p)= x₁^2Var(R₁)+ x₂^2Var(R₂)+ 2X₁X₂Cov(R₁,R₂)
C)Corr(R_i,R_j)=
D)Cov(R_i,R_j)= E[(R_i - E[R_i])(R_j - E[R_j])]

Question 18

Use the table for the question(s)below.
Consider the following returns:

The covariance between Stock X's and Stock Y's returns is closest to:

A)0.10
B)0.29
C)0.12
D)0.69

Question 19

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.
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?

A)13.50%
B)14.00%
C)13.75%
D)14.50%

Question 20

Which of the following statements is FALSE?

A)A stock's return is perfectly positively correlated with itself.
B)When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another.
C)The closer the correlation is to -1, the more the returns tend to move in opposite directions.
D)The variance of a portfolio depends only on the variance of the individual stocks.

Question 21

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

Consider an equally weighted portfolio that contains 20 stocks. If the average volatility of these stocks is 35% and the average correlation between the stocks is .4, then the volatility of this equally weighted portfolio is closest to:

A).17
B).41
C).14
D).37

Question 22

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

Which of the following formulas is INCORRECT?

A)Variance of an equally Weighted Portfolio = (1 - )(Average Variance of Individual Stocks)+
(Average covariance between the stocks)
B)Variance of a portfolio =
C)Variance of a portfolio =
D)Variance of a portfolio =

Question 23

Use the table for the question(s)below.
Consider the following returns:

The Volatility on Stock Z's returns is closest to:

A)3%
B)13%
C)16%
D)18%

Question 24

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:

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

Question 25

Use the table for the question(s)below.
Consider the following returns:

The Volatility on Stock X's returns is closest to:

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

Question 26

Use the table for the question(s)below.
Consider the following returns:

The Correlation between Stock X's and Stock Z's returns is closest to:

A)0.71
B)0.60
C)0.62
D)0.05

Question 27

Use the table for the question(s)below.
Consider the following returns:

Calculate the variance on a portfolio that is made up of equal investments in Stock Y and Stock Z stock .

Question 28

Use the table for the question(s)below.
Consider the following returns:

The Volatility on Stock Y's returns is closest to:

A)35%
B)31%
C)42%
D)18%

Question 29

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 stock is closest to:

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

Question 30

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

The variance on a portfolio that is made up of a $6000 investments in Microsoft and a $4000 investment in Wal-Mart stock is closest to:

Question 31

Use the table for the question(s)below.
Consider the following returns:

Calculate the covariance between Stock Y's and Stock Z's returns .

Question 32

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 Y stock is closest to:

A)0.12
B)0.10
C)0.69
D)0.29

Question 33

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

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:

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

Question 34

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:

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

Question 35

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

Which of the following statements is FALSE?

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 36

Use the table for the question(s)below.
Consider the following returns:

Calculate the correlation between Stock Y's and Stock Z's returns .

Question 37

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

The variance on a portfolio that is made up of a $6000 investments in Duke Energy and a $4000 investment in Wal-Mart stock is closest to:

A).050
B).045
C).051
D)-0.020

Question 38

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

Which of the following statements is FALSE?

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.

Question 39

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

The variance on a portfolio that is made up of equal investments in Duke Energy and Microsoft stock is closest to:

A).065
B)0.090
C).149
D)-0.020

Question 40

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

Which of the following statements is FALSE?

A)The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio.
B)The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights.
C)The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio.
D)The volatility declines as the number of stocks in a portfolio grows.

Question 41

Suppose you have $10,000 in cash to invest. You decide to sell short $5,000 worth of Kinston stock and invest the proceeds from your short sale, plus your $10,000 into one-year U.S. treasury bills earning 5%. At the end of the year, you decide to liquidate your portfolio. Kinston Industries has the following realized returns: The return on your portfolio is closest to:

A)-0.5%
B)13.5%
C)-2.5%
D)14.5%

Question 42

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

Which of the following statements is FALSE?

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 43

Which of the following statements is FALSE?

A)A portfolio that consists of a long position in the risk-free investment is known as a levered portfolio.
B)The optimal portfolio will not depend on the investor's personal tradeoff between risk and return.
C)The volatility of the risk-free investment is zero.
D)Our total volatility is only a fraction of the volatility of the efficient portfolio, based on the amount we invest in the risk free asset.

Question 44

Use the table for the question(s)below.
Consider the following expected returns, volatilities, and correlations:

Consider a portfolio consisting of only Duke Energy and Microsoft. The percentage of your investment (portfolio weight)that you would place in Duke Energy stock to achieve a risk-free investment would be closest to:

A)15%
B)40%
C)23%
D)10%

Question 45

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

Which of the following statements is FALSE?

A)When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them.
B)An investor seeking high returns and low volatility should only invest in an efficient portfolio.
C)When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification.
D)Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Question 46

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

Which of the following statements is FALSE?

A)A short sale is a transaction in which you buy a stock that you do not own and then agree to sell that stock back in the future.
B)The efficient portfolios are those portfolios offering the lowest possible level of volatility for a given level of expected return.
C)A positive investment in a security can be referred to as a long position in the security.
D)It is possible to invest a negative amount in a stock or security call a short position.

Question 47

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

Which of the following statements is FALSE?

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 48

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

Question 49

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

Which of the following statements is FALSE?

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 50

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

Consider an equally weighted portfolio that contains 100 stocks. If the average volatility of these stocks is 50% and the average correlation between the stocks is .7, then the volatility of this equally weighted portfolio is closest to:

A).72
B).63
C).40
D).50

Question 51

Consider a portfolio consisting of only Microsoft and Wal-Mart stock. Calculate the expected return on such a portfolio when the weight on Microsoft stock is 0%, 25%, 50%, 75%, and 100%

Question 52

Consider a portfolio consisting of only Microsoft and Wal-Mart stock. Calculate the volatility of such a portfolio when the weight on Microsoft stock is 0%, 25%, 50%, 75%, and 100%

Question 53

Use the table for the question(s)below.
Consider the following expected returns, volatilities, and correlations:

The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

A)8%
B)9%
C)11%
D)6%

Question 54

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

What is the variance on a portfolio that has $2000 invested in Duke Energy, $3000 invested in Microsoft, and $5000 invested in Wal-Mart stock?

Question 55

Use the table for the question(s)below.
Consider the following expected returns, volatilities, and correlations:

The volatility 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:

A)9%
B)14%
C)11%
D)12%

Question 56

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:

A)21%
B)12%
C)27%
D)18%

Question 57

Which of the following statements is FALSE?

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 58

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?

Question 59

Use the table for the question(s)below.
Consider the following expected returns, volatilities, and correlations:

The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

A)28%
B)29%
C)24%
D)23%

Question 60

Which of the following statements is FALSE?

A)Margin investing is a risky investment strategy.
B)Because our return on the risk-free investments is fixed and does not move with (or against)our portfolio, the correlation between the risk-free investment and the portfolio is always equal to one.
C)Short selling the risk free investment is equivalent to borrowing money at the risk-free interest rate through a standard loan.
D)Margin investing can provide higher expected returns than investing in the efficient portfolio using only the funds we have available.

Question 61

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:

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

Question 62

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 expected return on the precious metals fund is closest to:

A)-3%
B)4%
C)1%
D)10%

Question 63

Which of the following statements is FALSE?

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 64

Use the information for the question(s)below.
Sisyphean industries is seeking to raise capital from a large group of investors to fund a new project. Suppose that the efficient portfolio has an expected return of 14% and a volatility of 20%. Sisyphean's new project is expected to have a volatility of 40% and a 70% correlation with the efficient portfolio. The risk-free rate is 4%.
The required return for Sisyphean's new project is closest to:

A)24%
B)14%
C)18%
D)10%

Question 65

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:

A)-0.3
B)-0.6
C)0.3
D)0.6

Question 66

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%.
The Sharpe ratio for the efficient portfolio is closest to:

A)0.7
B)1.0
C)1.4
D)1.2

Question 67

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.
Will adding the precious metals fund improve your portfolio?

Question 68

Which of the following statements is FALSE?

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 69

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:

A)40%
B)20%
C)30%
D)24%

Question 70

Which of the following statements is FALSE?

A)The Sharpe ratio if 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 71

Which of the following statements is FALSE?

A)An investor's preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment.
B)Conservative investors will invest a small amount in the tangent or efficient portfolio, choosing a portfolio on the line near the risk-free investment
C)Only aggressive investors will choose to hold the portfolio of risky assets, the tangent or efficient portfolio.
D)Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin.

Question 72

Which of the following statements is FALSE?

A)A portfolio is efficient if it has the highest possible Sharpe ratio; that is it is efficient if it provides the largest increase in expected return possible for a given increase in volatility.
B)The required return for an investment is equal to a risk premium that is equal to the risk premium of the investor's current portfolio scaled by .
C)Increasing the investment in investment I will increase the Sharpe ratio of portfolio P if its expected return E[R_i] exceeds the required return r_i, which is given by r_i = r_f + × (E[R_p] - r_f).
D)If a security i's expected return is less than the required return r_i, we should reduce our holding of security i.

Question 73

Which of the following equations is INCORRECT?

A)E[R_xp] = r_f + x(E[R_p] - r_f)
B)E[R_xp] = (1 - x)r_f + xE[R_p]
C)Sharpe ratio =
D)SD( R_xp)= xSD(R_p)

Question 74

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

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

Question 75

Which of the following statements is FALSE?

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[R_i] = R_p.

Question 76

Suppose that you want to maximize your expected return without increasing your risk. How can you achieve this goal? Without increasing your risk, what is the maximum expected return you can expect?

Question 77

Use the information for the question(s)below.
Sisyphean industries is seeking to raise capital from a large group of investors to fund a new project. Suppose that the efficient portfolio has an expected return of 14% and a volatility of 20%. Sisyphean's new project is expected to have a volatility of 40% and a 70% correlation with the efficient portfolio. The risk-free rate is 4%.
The beta for Sisyphean's new project is closest to:

A)1.25
B)1.40
C)0.70
D)1.75

Question 78

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 expected return on your of your investment is closest to:

A)18%
B)20%
C)12%
D)24%

Question 79

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:

A).12.0%
B)12.5%
C)13.4%
D)15.0%

Question 80

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%.
The Sharpe ratio for your portfolio is closest to:

A)1.2
B)0.6
C)1.0
D)0.7