FIN397 S07Exam2A - FIN 397.1: Spring 2007 Exam # 2:...

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FIN 397.1: Spring 2007 Exam # 2: Portfolio Theory and Asset Pricing March 22, 2007 NAME: Time allowed: 1 hour, 15 minutes. Maximum possible score: 100. NOTE: If I cannot understand your calculations, I will not be able to give you full credit even if your Fnal answer is correct. You cannot say “these calculations are obvious.” If a problem is missing some key information that you think is necessary to solve the problem, please ask me to clarify the question or state your confusions clearly. Alternatively, please make appropriate assumptions, state them clearly and proceed. No credit will be awarded if you fail to state your confusions or assumptions explicitly even if the question is wrong . Partial credits may be awarded if you show your calculations or provide arguments to support your answers. 1
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I Multiple Choice Questions (20 points, 15 minutes) 1. (2 points) Portfolio theory is most concerned with: (a) The elimination of systematic risk. (b) The eFect of diversi±cation on portfolio risk. (c) The identi±cation of idiosyncratic (or unsystematic) risk. (d) Active portfolio management to enhance return. 2. (2 points) Which statement about portfolio diversi±cation is correct? (a) Proper diversi±cation can reduce or eliminate systematic risk. (b) Diversi±cation reduces the portfolio’s expected return because it reduces a port- folio’s total risk. (c) As more securities are added to a portfolio, total risk typically would be expected to fall at a decreasing rate. (d) The risk-reducing bene±ts of diversi±cation do not occur meaningfully until at least 30 individual securities are included in the portfolio. 3. (2 points) The term efficient frontier refers to the set of portfolios that ———-. (a) yield the greatest return for a given level of risk. (b) involve the least risk for a given level of return. (c) both a and b above. (d) None of the above answers are correct. 4. (2 points) The arbitrage pricing theory (APT) diFers from the single-factor capital asset pricing model (CAPM) because the APT: (a) Places more emphasis on market risk. (b) Minimizes the importance of diversi±cation. (c) Recognizes multiple unsystematic risk factors. (d) Recognizes multiple systematic risk factors.
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FIN397 S07Exam2A - FIN 397.1: Spring 2007 Exam # 2:...

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