This preview shows pages 1–3. Sign up to view the full content.
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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentI
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 riskreducing 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 singlefactor 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.
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '07
 KBrowning
 Pricing

Click to edit the document details