Finance 367
Spring 2008
Exam 2 (Practice) Solution
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1.
Historical records regarding returns on stocks, Treasury bonds, and Treasury bills
between 1926 and 1998 show that ____A______.
A) stocks offered investors greater rates of return than bonds and bills
B) stock returns were less volatile than those of bonds and bills
C) bonds offered investors greater rates of return than stocks and bills
D) bills outperformed stocks and bonds
2.
The equity market risk premium is defined as ___A________.
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.
3.
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 ____B______.
A) $3,000
B) $7,000
C) $7,500
D) $10,000
4.
You invest $100 in a portfolio that is composed of a risky asset with an expected rate
of return of 12% and a standard deviation of 15% and a treasury bill with a rate of
return of 5%. _____D_____ of your money should be invested in the risky asset
to form a portfolio with an expected rate of return of 9%.
A) 87%
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 Spring '08
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 Finance, Standard Deviation, Capital Asset Pricing Model, treasury bills

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