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practiceII - Practice Problems Midterm II 1 Multiple...

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Practice Problems – Midterm II 1. Multiple Choice (30 points: 3 points each) This problem includes ten multiple-choice questions. Choose only one answer for each question. You do not have to explain why you have selected a particular one. If you feel that a question is ambiguous, feel free to write a justification for your answer on the test sheet. 1. Systematic risk is the component of a stock’s variance that A) Cannot be diversified away in the market portfolio B) Associated with firm-specific factors C) Depends only on the stock’s correlation with the market portfolio D) Depends only on the covariance of the stock with the market portfolio 2. You purchased 75 shares of Intel common stock on margin at $25 per share. Assume the initial margin is 60% and the maintenance margin is 20%. You will get a margin call if the price falls below __________. Assume the stock pays no dividend and ignore interest on margin. 3. The tangency portfolio is the portfolio with 4. Assume the correlation between the return on AMD and Lucent stock is 0.60. The standard deviation of AMD’s return is 0.21, while the standard deviation of Lucent’s return is 0.35. It follows that the portfolio with minimum variance which combines AMD and Lucent is 5. The objective of a money manager charged with creating the overall portfolio for a client is to A) Minimize variance, or risk B) Maximize expected return C) Maximize the Sharpe ratio D) Minimize correlation
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6. The tangency portfolio using stock A and stock B is defined as: 30% in stock A and 70% in stock B. The standard deviation of the tangency portfolio is 0.18. Assuming you want to create a personal portfolio with a standard deviation of 0.25 by combining the tangency portfolio with the risk-free asset, portfolio weights would be
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