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Unformatted text preview: FIN 331 SUMMER 2007 EXAM 2 IKE M. PAGE 1 OF 3
Name 1K9 M’ Only one of the four answers is correct. Select the answer you believe to be most correct. There are 25 questions.
1. You pay $9,800 for a Treasury bill maturing in two months. What is the APR for this investment? A. 2% B. 12% @12.2% D. 16.4% APR 1 w, = .34]
' 018W
2. You pay $9,700 for a Treasury bill maturing in six months. What is the EAR for this investment?
A 31% B 6% C 618% @628% ”m = 0030727325' Hemaammﬁi :648/
6700 3. The capital allocation line is also the . ® investment opportunity set formed with a risky asset and a riskfree asset B. investment opportunity set formed with two risky assets C. line on which lie all portfolios that offer the same utility to a particular investor D. line on which lie all portfolios with the same expected rate of return and different standard deviations 4. If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of
inﬂation over the next year to be 3%, what‘is the lowest nominal return that you would be satisﬁed with?
A. 3.00% B. 8.00% c. 11.00% @11.24% (1‘08>Ll~039 I = I" W X 5. A Treasury bill pays a 6% rate of return. A risk averse investor invest in a risky portfolio that
pays 12% with a probability of 40% or 2% with a probability of 60% because . A. might; she is rewarded a risk premium @would not; because she is not rewarded any risk premium
C. would not; because the risk premium is small D. cannot be determined E ’70: 1250) 410$) 2 67. 6. The holding period return on a stock was 30%. Its ending price was $26 and its cash dividend was $1.50. Its beginning price must have been H—Pﬁ = w ______. P, ' ,
A. $20.00 .$21.15 c. $86.67 D. $91.67 .3“): 2"%+,‘},=7 ”#273,, p921) a; 7. You invest $100 in a complete portfolio. The complete portfolio is composed of a risky asset with an
expected rate of return of 12% and a standard deviation of 15% and a treasury bill with a rate of return of 5%. of your money—should—b e—in—vested—in—therisky—assettoform—a—portfoliowith—anexp ected—rate—of—___ __ return of9%. aslzx +Eél—X)
A. 87% B. 77% C. 67% ©57% a: 7x
x = §7X 8. Asset A has an expected return of 15% and a rewardtovariability ratio of .4. Asset B has an expected return
of 20% and a rewardtovariability ratio of .3. A riskaverse investor would prefer a portfolio using the riskfree
asset and . @ asset A B. asset B C. no risky asset D. can't tell from the data given 9. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is
the rewardtovariability ratio? 2 a y , a
@.40 B. .50 c. .75 D. .80 if = ' Lt 10. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated.
The global minimum variance portfolio has a standard deviation that is always .
A. equal to the sum of the securities standard deviations B. equal to 1 © equal to 0 D. greater than 0 11. The standard deviation of return on investment A is .10 while the standard deviation of return on investment
B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A
and B is . ‘ A. .12 B. .36 ((3.60 D. .77 PAGE 2 OF 3 12. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 5% while .
stock B has a standard deviation of return of 15%. The correlation coefﬁcient between the returns on A and B 13
.5. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The variance of
return on the portfolio is . 5;}; . ”91.0914. 'éZC‘ 15f; Z (.1005) (.o§)L15')('5) A. .0035 B. .0085 C. .0094 @0103 s _ 0'03 13. According to Tobin's separation property, portfolio choice can be separated into two independent tasks
consisting of and .
A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best riskreturn tradeoffs
B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are con31stent with the investor's risk proﬁle
((3 identifying the optimal risky portfolio; constructing a complete portfolio from T—bills and the optimal risky portfolio based on the investor's degree of risk aversion
D. None of the above answers is correct 14. Stock A in a two asset portfolio has a standard deviation of 23%. Stock B in the same portfolio has a standard deviation of 15 %. If the two assets have a correlation coefﬁcient of 0.0, of the portfolio invested in Stock A will minimize the p01tfolio variance. M :‘m WNW {in ,4 a £91.: 3 _,_i£.._; @29.8% B. 42.5% c. 60.5% D. 65.2% and 25 1:315
1‘. '20! ‘ ‘f 15. Stocks A, B, C and D have betas of 1.5, 0.4, 0.9 and 1.7 respectively. What is the beta of an equally.
weighted portfolio of A, B and C? I 3.4“” ﬂ _ =. 3
A..25 .93 0.1.00 D.1.13 ep—ﬂ—g—ﬁ ‘1 16. Consider the CAPM. The riskfree rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? ,
A. 6% B. 15.6% c. 18% ©21.6% EV:6+'ZC"3)=N5/ 17. According to the capital asset pricing model, fairly priced securities have A. negative betas B. positive alphas C. positive betas @ zero alphas 18. Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has
a beta of 0.7 and an expected return of 17%. The riskfree rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio and a long position in
A.A,A @A,B C.B,A D.B,B 2‘3 "0 '7 ”28 19. Security X has an expected rate of return of 13% and a beta of 1.15. The riskfree rate is 5% and the market
expected rate of return is 15%. According to the capital asset pricing model, security X is .
A. fairly priced ® overpriced C. underpriced D. None of A, B, C 5r = 5'4— 19045): léS‘z 20. Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return
on the market portfolio is .0225. If the riskfree rate of return is 4%, the expected return on the market portfolio is “L
———' v at“ :— 140....
A. 6.75% B. 9.0% (3) 10.75% D. 172.0% Vang”: 3 (,0 215) ? Y”: [9,75% 21. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this
formed portfolio is A.1.14 B.1.20 Z3126 13.2.40 rpzéél‘5)+‘%‘q>:1125 PAGE 3 OF 3
22. Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the riskfree rate is 5%. The alpha of the stock is . .
A. 1.7% .3.7% c. 5.5% D. 8.7% Er = ;+ 30.)) 933/.
>4 = )Z~‘J’3 53.7%
23. The variance of return on the market portfolio is .0400 and the expected return on the market portfolio is
20%. If the riskfree rate of return is 10%, the market degree of risk aversion, A, is A.0.5 .25 0.3.5 13.5.0 Ava—Y'g :.2—.I:2_5
a» war 24. In his famous critique of the CAPM, Roll argued that the CAPM is
® untestable because the true market portfolio can never be observed
B. of limited use because systematic risk can never be entirely eliminated
C. too simplistic and a multi—factor model such as the APT should be used in measuring systematic risk D. More than one of the above Answers is correct 25. If the only data available is that the beta of a stock is 1.4, What is the likely return on an investment in this stock if the market falls 5%?
® 6% B. 5% C. +5% D. +6% ...
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