FINC314 Potential Final (2)

FINC314 Potential Final (2) - Sample Exam #2 1. Multiple...

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Sample Exam #2 1. Multiple Choice Choose the best answer for each of the following questions. 1. Consider the four risky securities described below. Which of these securities would be the best to combine with a Treasury Bill that pays a risk-free rate of 7.0%? a) Security A : E(R)=10% σ =14.0% b) Security B : E(R)=15% σ =19.0% c) Security C : E(R)=21% σ =19.0% d) Security D : E(R)=18% σ =14.0% 2. Given the two security choices described below, which security would be selected by a risk- averse investor? Security A is a risk-free security with a return equal to 8.0%. Security B is a risky security that pays -4% or +20% with equal probability. a) Security A would be selected by a risk-averse investor b) Security B would be selected by a risk-averse investor c) A risk-averse investor would be indifferent between Security A and Security B d) The answer cannot be determined without knowing the investor’s exact risk- aversion level and utility function. 3. For each individual investor, the optimal combination of a risky security and a risk-free security is determined by: a) The point of minimum variance on the Efficient Frontier. b) The point of tangency between the Capital Allocation Line and the Efficient Frontier. c) The point of tangency between the Efficient Frontier and the investor’s indifference curves. d) The point of tangency between the Capital Allocation Line and the investor’s indifference curves. 4. Other things equal, diversification is most effective when: a) Security returns are uncorrelated. b) Security returns are positively correlated. c) Security returns are negatively correlated. d) Security returns are high.
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5. Consider the two risky securities described below. If the correlation between these securities is ρ = -1, what weights in securities X and Y would give you a perfect hedge (or zero risk)? Security X : E(R X )=6.0% σ X =8.0% Security Y : E(R Y )=12.0% σ Y =24.0% a) 50% in Security X and 50% in Security Y b) 75% in Security X and 25% in Security Y c) 25% in Security X and 75% in Security Y d) None of the above. 6.
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This note was uploaded on 11/02/2010 for the course FINC 314 taught by Professor Silver during the Spring '08 term at University of Delaware.

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FINC314 Potential Final (2) - Sample Exam #2 1. Multiple...

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