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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: 4. Other things equal, diversification is most effective when:

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