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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 riskfree security is 5.0%.
Which of the securities listed would
be the best security to combine with the riskfree 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 riskaversion 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
Riskfree
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 riskfree security
b)
Invest 75% of your money is security X and 25% in the riskfree security
c)
Borrow 25% at the riskfree rate and take a margin position of 125% in security X
d)
Borrow 75% at the riskfree 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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a)
Negative
b)
Positive
c)
Zero
d)
Diversification is unrelated to the correlation between securities
5.
The riskfree rate is 6.0% and the riskpremium 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
Aftertax 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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 Spring '08
 SILVER
 Capital Asset Pricing Model, Financial Markets, security information, riskfree security

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