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exam2_solutions_Spring2008

# exam2_solutions_Spring2008 - EXAM 2 SOLUTIONS Finance 34600...

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EXAM 2 SOLUTIONS Finance 34600 – Investment Theory Professor Shane A. Corwin University of Notre Dame, London Centre Spring Semester 2008 April 2, 2008 INSTRUCTIONS : 1. You have 75 minutes to complete the exam. 2. The exam is worth a total of 100 points. 3. You may use a calculator and an 8 ½ by 11 inch formula sheet. You must hand in the formula sheet with your exam (put your name on it). 4. Allocate your time wisely. Use the number of points assigned to each problem as your guide. 5. In order to get full credit on the problems, you must show ALL your work!

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Finance 34600 – Exam 2 April 2, 2008 1 Multiple Choice (32 points) Choose the best answer for each of the following questions. The questions are worth 4 points each. 1. The expected return on the market is 15% and the risk-free rate is 5%. The expected return on security XYZ is 25%. Assuming CAPM holds and the market is in equilibrium, what must be the Beta on security XYZ? a) 1.50 b) 1.67 c) 2.00 d) 2.50 2. You estimate a market model regression for Intel stock. Based on your estimates, the Beta of Intel stock is 1.2. You also estimate that the standard deviation of returns is 35% for Intel and 21% for the market. What proportion of Intel’s variance is systematic (market) risk? 3. In a world with no risk-free security, the optimal risky portfolio is determined by: 4. Consider a portfolio formed by placing a portion of your investment in risky security A and the rest in risky security B, where the correlation between the risky securities is 0.1. Which of the following statements regarding the standard deviation of your new portfolio is correct?
Finance 34600 – Exam 2 April 2, 2008 2

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exam2_solutions_Spring2008 - EXAM 2 SOLUTIONS Finance 34600...

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