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The Sample Second Midterm Exam
Student: ___________________________________________________________________________
1. Of the alternatives available, __________ typically have the highest standard deviation of returns.
A. commercial paper
B. corporate bonds
C. stocks
D. treasury bills
2. The arithmetic average of 12%, 15% and 20% is _________.
A. 15.7%
B. 15%
C. 17.2%
D. 20%
3. The market risk premium is defined as ___________.
A. the difference between the return on an index fund and the return on Treasury bills
B. the difference between the return on a small firm mutual fund and the return on the Standard and Poor's 500
index
C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills
D. the difference between the return on the highest yielding asset and the lowest yielding asset.
4. The holding period return on a stock was 30%. Its ending price was $26 and its cash dividend was $1.50. Its
beginning price must have been __________.
A. $20.00
B. $21.15
C. $86.67
D. $91.67

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*Sign up* 5. Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a
probability of 60% or 5% with a probability of 40%. Second, a treasury that pays 6%. If you invest $50,000 in
the risky portfolio, your expected profit would be __________.
A. $3,000
B. $7,000
C. $7,500
D. $10,000
You invest $100 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected
rate of return of 12% and a standard deviation of 10% and a treasury bill with a rate of return of 5%.
6. __________ of your complete portfolio should be invested in the risk-free asset if you want your complete
portfolio to have a standard deviation of 9%.
A. 100%
B. 90%
C. 50%
D. 10%
7. The slope of the capital allocation line formed with the risky asset and the risk-free asset is __________.
A. 1.4
B. . 7
C. .5
D. .3
8. Risk that can be eliminated through diversification is called ______ risk.
A. unique
B. firm-specific
C. diversifiable
D. all of the above
9. Diversification is most effective when security returns are __________.
A. high
B. negatively correlated
C. positively correlated
D. uncorrelated

10. Beta is a measure of __________.
A. firm specific risk
B. diversifiable risk
C. market risk
D. unique risk
11. The slope of a capital allocation line measures the reward-to-variability ratio of ___________.
A. all portfolios on the efficient frontier
B. all portfolios on the capital market line
C. the minimum variance portfolio only
D. all portfolios on the particular capital allocation line in question
12. The values of beta coefficients of securities are ___________.
A. always positive
B. always negative
C. always between positive 1 and negative 1
D. usually positive, but are not restricted in any particular way
13. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?
A. Market risk

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