FINC314 Sample Final

FINC314 Sample Final - 0 Sample Final ExamFINC314 Multiple...

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0 Sample Final Exam—FINC314 Multiple Choice Use the expected returns and standard deviations described below to answer question 1. Security Expected Return Standard Deviation A 15.0% 4.00% B 12.0% 10.00% C 14.0% 6.25% 1. You wish to create a portfolio by combining one of the risky securities above with the risk- free security. The return on the risk-free security is 5.0%. Which of the securities listed would be the best security to combine with the risk-free security? a) security A b) security B c) security C d) The answer cannot be determined from the information given 2. Consider the two securities listed below: Security Expected Return Standard Deviation Risk-free 8.0% 0.0% X 16.0% 12.0% Based on this information, which of the following investments would provide an expected return of 22.0%? a) Invest 25% of your money is security X and 75% in the risk-free security b) Invest 75% of your money is security X and 25% in the risk-free security c) Borrow 25% at the risk-free rate and take a margin position of 125% in security X d) Borrow 75% at the risk-free rate and take a margin position of 175% in security X 3. Diversification is most effective when the correlation between securities is: a) Negative b) Positive c) Zero d) Diversification is unrelated to the correlation between securities
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1 4. The risk-free rate is 6.0% and the risk-premium on the market is 12.0%. Based on CAPM, what is the expected return on a security with a beta of 1.3? a) 12.0% b) 13.8% c) 18.0% d) 21.6% 5. Your portfolio has an initial value of $575,000 and a final value of $630,000. What is your After-tax Real return if you are in the 28% tax bracket and the inflation rate is 4%? a) 9.57% b) 6.89% c) 4.01% d) 2.89% 6. Assume that your broker requires an initial margin rate of 60% and a maintenance margin rate of 45%. Using the full amount of margin allowed, you purchase 500 shares of IBM stock on margin at the current market price of $125 per share. At what price will you receive a margin call? a) $90.91 b) $118.50 c) $137.93 d) $112.21 7. The expected return on a GM stock is 13.0%, the expected return on the market is 16.0%, and the risk-free rate is 5.0%. What would be the revised expected return on GM stock if the beta of GM doubled? a) 21.0% b) 31.0% c) 29.0% d) 26.0% 8. Which of the following portfolios would result in a portfolio Beta of 0.75? a) 50% in the market and 50% in the risk-free security b) 25% in the market and 75% in the risk-free security c) 75% in the market and 25% in the risk-free security d) 125% in the market and -25% in the risk-free security
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2 9. Although Modern Finance is based primarily on rational economic behavior, the current trend in New Finance is based on: a) Law and Accounting b) Statistics and Psychology c) Law and Orderliness d) Welfare and Subsidies 10. A fellow employee at your firm tells you that he has developed a foolproof strategy for making risk-adjusted profits in the stock market. His strategy involves buying stocks that are at
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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 Sample Final - 0 Sample Final ExamFINC314 Multiple...

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