Practice Problems – Midterm II
1. Multiple Choice (30 points: 3 points each)
This problem includes ten multiplechoice 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 firmspecific 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.
A) $56.25
B) $37.50
C) $12.75
D) $18.75
E) None of the above.
Let L be the value of your loan. Then
6
.
0
25
*
75
25
*
75
=

L
,
which implies that
L=750.
You will get
a margin call if the price falls below P where
2
.
75
*
750
75
*
=

P
P
, so P=12.5.
3.
The tangency portfolio is the portfolio with
A. The highest expected return
B. The lowest standard deviation
C. The highest correlation
D.
The highest Sharpe ratio
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
A. 100% in AMD, 0% in Lucent
B. 0% in AMD, 100% in Lucent
C. 50% in AMD, 50% in Lucent
D. 37.5% in AMD, 62.5% in Lucent
E. 62.5% in AMD, 37.5% in Lucent
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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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 riskfree asset, portfolio weights would be
A.
42% in A and 97% in B, 39% in riskfree
B. 42% in A and 58% in B, 0% in riskfree
C. 139% in A and 9% in B, 48% in riskfree
D. 9% in A and 139% in B,  48% in riskfree
7.
Assume stock A is part of a portfolio. Let
A
r
be the return of stock A and
p
r
be the return on the
portfolio. Which of the following statements is not necessarily true regarding the regression
model
e
br
a
r
p
A
+
+
=
?
A) Variation in
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 Spring '10
 Sata
 Standard Deviation, Capital Asset Pricing Model, Modern portfolio theory, MSO

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