172a vA-ex2 - investors maximize their net worth (i.e.,...

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investors maximize their net worth (i.e., they are “rational”) and firms maximize their common shareholders’ net worth. a) all markets are efficient. b) firms are typical of the industry in which they operate. c) the par value (principal) of a bond is $1,000. (1) We are given a sample of returns for 2 companies. Year Co. A Co. B 1 12% -5 % 2 18 11 3 7 12 4 0 15 The average returns for the companies are (a) 12.33% for A and 8.00% for B (b) 12.33% for A and 11.00% for B (c) 9.25% for A and 8.25% (d) None of the above (2) Consider the returns for companies A and B of Question 1. If you construct a portfolio with 30% of your funds invested in A and the remainder in B, the average return of your portfolio would be (a) 8.55% (b) 9.30% (c) 11.40% (d) None of the above Consider the returns for companies A and B of Question 1. The sample standard deviation of the portfolio of 30% of your funds invested in A and the remainder in B is (a) 4.99 (b) 5.77 (c) 6.01 (d) none of these (3) Two stocks A and B have expected returns of 20% and 30%, and standard deviations of 25% and 35%, respectively. The correlation coefficient of the returns is -0.20. If one invests 30% of one’s funds in A and the remainder in B, (a) The portfolio return is 27% with a standard deviation of 32.0% (b) The portfolio return is 27% with a standard deviation of 12.0% (c) the portfolio return is 27% with a standard deviation of 24.145% (d) none of the above (4) Since the correlation of returns between the stocks A and B of Question (4) is negative (-0.20), then we can always construct a portfolio of the two stocks such that the portfolio’s risk is zero. (a) True (b) False (5) Two stocks A and B have expected returns of 20% and 30%, and standard deviations of 25% and 35%, respectively. If the correlation coefficient of the returns of the two stocks is -0.5, then the efficient (investment) set for these two stocks is (a) A curve (as opposed to a straight line) (b) The segment of the straight line above the minimum standard deviation point (c) A straight line (d) The segment of the curve above the minimum standard deviation point (e) None of the above (6) If the correlation coefficient between the returns of two securities is zero, then the efficient investment set for them is a straight line. (a) True (b) False (7) If the objective is to minimize the risk of a portfolio, then we should select stocks whose returns have a correlation coefficient of (a) -1 (b) +1 (c) 0 (d) less than -1 (e) none of the above (8) A risk averse investor is one (a) who does not invest in risky securities (b) who does not gamble (c) who does not buy insurance (for her car, house, health, ….) 1
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(d) who wants to be compensated for taking risk (e) who invests only in T-bills (9) Risk means (a) Uncertainty in returns on investment and as such is neither good or bad (b) The likelihood of losing your investment (c) The likelihood that your actual return may turn out to be lower than you expected (d) Standard deviation of the rate of return
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This note was uploaded on 09/08/2010 for the course BUS 172A at San Jose State.

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172a vA-ex2 - investors maximize their net worth (i.e.,...

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