Practice_Final_2

Practice_Final_2 - Investment Science Practice Final Exam...

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Investment Science Practice Final Exam
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Problem 1: (Multiple Choice, True/False) A ) You are considering a portfolio consisting of positive (>0) amounts of 2 securities with positive correlation between them. The securities have a standard deviation of 1 σ and 2 where 2 1 . The resulting portfolio standard deviation must be: a) greater than min ( 29 2 1 , b) greater than max ( 29 2 1 , c) less than min ( 29 2 1 , d) less than max ( 29 2 1 , B ) The Markowitz problem is: a) find the factor model that arrives at the same expected returns as the CAPM b) find two portfolios whose combination can define the entire minimum variance set c) find a portfolio with the min variance for a given expected return d) find the portfolio one would combine with the risk free asset to form the efficient frontier C ) Eliminating the ability to short securities moves the efficient frontier to the left on an expected return vs. standard deviation graph. True False D ) Suppose the min variance point of risky assets only is at ( 29 05 . 0 , 03 . 0 ) ( = = r E . The risk free rate is 0.04. What point is definitely not on the efficient frontier when the risk free asset is included? (Choose only one) a) ( 29 05 . 0 , 05 . 0 ) ( = = r E b) ( 29 05 . 0 , 03 . 0 ) ( = = r E c) ( 29 10 . 0 , 08 . 0 ) ( = = r E d) ( 29 15 . 0 , 10 . 0 ) ( = = r E E ) There exists a risk free rate of 0.04. Therefore a mean variance investor would never hold a positive amount of a security with an expected return of less than 0.04. True False
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For parts F and G below, refer to the following information. Assume that the risk free rate for borrowing and lending is 6%. There are two portfolios, which are composed of all available assets (risky assets as well as the risk free asset). The correlation coefficient between the returns of these two portfolios is 0.8. Portfolio A: expected return is 21%, standard deviation of return is 24% Portfolio B: expected return is 16%, standard deviation of return is 20% F ) Portfolio A is mean-variance efficient. True False Not enough information to determine G ) Portfolio B is mean-variance efficient. True False Not enough information to determine Problem 2: I have a lamp in my office that has an old light bulb in it. The light bulb is expected to last for another two years. When this old light bulb goes out, I can turn it in to a store for a $1 rebate off a new energy efficient light bulb that has a regular price of $5 per bulb and lasts for 10 years. I expect to have this lamp forever, and expect to always use the energy efficient bulbs after the current bulb burns out (Note that the $1 rebate only applies when I turn in the current bulb, and I won’t receive any rebates after that). If the interest rate is 10% per year compounded yearly, what value do I place on the current light bulb in the lamp?
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Problem 3: (Tax on Bonds) Suppose you are interested in investing in two 3-year bonds. Bond A is a zero coupon bond, and Bond B is a 6% coupon bond.
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Practice_Final_2 - Investment Science Practice Final Exam...

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