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FINC314 Sample Final (2)

# FINC314 Sample Final (2) - 0 Sample Final ExamFINC852...

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0 Sample Final Exam—FINC852 Multiple Choice Use the expected returns and standard deviations described below to answer questions 1 and 2. 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. Suppose an investor with a risk-aversion level of A=2 wishes to hold just a single security. The investor’s utility function equals: U = E(R) – ½ A σ 2 . Which of the three securities listed above would be the optimal security for this investor? a) security A b) security B c) security C d) The answer cannot be determined from the information given 3. 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 4. Diversification is most effective when the correlation between securities is:

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1 a) Negative b) Positive c) Zero d) Diversification is unrelated to the correlation between securities 5. 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% 6. 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% 7. 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)
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FINC314 Sample Final (2) - 0 Sample Final ExamFINC852...

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