UNIVERSITY THE OF TOLEDO
COLLEGE OF BUSINESS ADMINISTRATION
FINA3480-003: Investments
- Fall 2011 Practice Problems for Final Exam
Instructions:
These problems should help you prepare for the midterm exam. It should take you no more than 2 hours
to go through these problems. Answers, but not solutions, are available for you to be able to check your
work.
1. A portfolio consists of the following securities. What is the portfolio weight of stock X?
2. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B.
What is the expected rate of return on this portfolio?
3. Stock A has a standard deviation of 12 percent per year and stock B has a standard deviation
of 16 percent per year. The correlation between stock A and stock B is .47. You have a
portfolio of these two stocks wherein stock B has a portfolio weight of 35 percent. What
is your portfolio variance?
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4. A stock fund has a standard deviation of 18 percent and a bond fund has a standard deviation
of 11 percent. The correlation of the two funds is .24. What is the approximate weight of
the stock fund in the minimum variance portfolio?
5. Of the following, Stock _____ has the greatest level of total risk and Stock _____ has the
highest risk premium.
6. A portfolio consists of two stocks and has a beta of 1.07. The first stock has a beta of 1.48 and
comprises 38 percent of the portfolio. What is the beta of the second stock?
7. The following portfolio has an expected return of _____ percent and a beta of _____.
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8. A risky asset has a beta of .88 and an expected return of 7.4 percent. What is the reward-torisk ratio if the risk-free rate is 2.8 percent?
9. Wilson Farms' stock has a beta of .79 and an expected return of 7.8 percent. The risk-free rate
is 2.6 percent and the market risk premium is 6 percent. This stock is ____ because the
CAPM return for the stock is _____ percent.
A. undervalued; 7.34
B. undervalued; 7.49
C. undervalued; 7.59
D. overvalued; 7.34
E. overvalued; 7.49
10. The market has a standard deviation of 11.7 percent while a risky security has a standard
deviation of 23.7 percent. The covariance of the stock with the market is .0149. What is
the beta of the stock?
11. The U.S. Treasury bill is yielding 3.1 percent and the market has an expected return of 11.2
percent. What is the Sharpe ratio of a portfolio that has a beta of 1.32 and a variance of .
027556?
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12. What is the Treynor ratio of a portfolio comprised of 50 percent portfolio and A 50 percent
portfolio B? (The risk-free rate is 3.3 percent and the market risk premium is 8.5 percent)
13. A portfolio has a beta of 1.52 and an actual return of 13.7 percent. The risk-free rate is 2.7
percent and the market risk premium is 7.8 percent. What is the value of Jensen's alpha?
14. Southern Fuel has an inventory of 714,000 gallons of heating oil. The futures contracts on
heating oil are based on 42,000 gallons. If the firm wishes to fully hedge its inventory, it
should take which one of the following positions in heating oil futures contracts?
A. long on 15
B. long on 17
C. short on 15
D. short on 16
E. short on 17
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15. You purchased five September wheat futures contracts at the open today and sold those
contracts at the close. What is your total profit or loss on these contracts?
16. Which one of the following options is out-of-the-money?
A. call with a $20 strike and a stock price of $21
B. put with a $35 strike and a stock price of $33
C. call with a $45 strike and stock price of $46
D. put with a $75 strike and a stock price of $70
E. call with a $50 strike and a stock price of $49
17. Josh owns 2 call options on Foster Glass stock. The exercise price is $47.50 and the stock
price at expiration is $49.01. What is the total payoff on the option contracts?
18. A stock is valued at $26 a share. A European 6-month call option has a strike price of $25
and an option premium of $1.40. The market rate is 9.5 percent and the risk-free rate is
2.5 percent. What is the price of a European 6-month put option with a $25 strike price?
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19. You analyze a firms financial statement and invest based upon the results of this analysis.
Which form of market efficiency must exist if you are able to earn excess profits on these
investments?
A. Weak-form
B. Historical-form
C. Semi-strong form
D. Full-form
E. Mild-form
20. Based on current dividend yields and expected capital gains, the expected rates of return on
portfolios A and B are 11% and 14%, respectively. The beta of A is 0.8 while that of B is
1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P500
index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is
31%, and that of the index is 20%.
a. If you currently hold a market index portfolio, would you choose to add either of these
portfolios to your holdings? Explain.
b. If instead you could invest only in bills and one of these portfolios, which would you
choose?
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