practice_exam2 - Finance 367 Spring 2008 Exam 2 (Practice)...

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Finance 367 Spring 2008 Exam 2 (Practice) Multiple Choices: 1. Historical records regarding returns on stocks, Treasury bonds, and Treasury bills between 1926 and 1998 show that __________. 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) 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 __________. A) $3,000 B) $7,000 C) $7,500 D) $10,000
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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%. __________ of your money should be invested in the risky asset to
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practice_exam2 - Finance 367 Spring 2008 Exam 2 (Practice)...

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