Winter 2010 Midterm solutions.W11

Winter 2010 Midterm solutions.W11 - Name: _ Student Number:...

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Name: _________________________________ Student Number: ____________________ Day of your lecture (Monday, Tuesday, or Thursday): _________________________________ AP/ADMS 3531, Winter 2010 Professors Domian and Pestano Midterm Exam This exam consists of 30 multiple choice questions. Show your responses on the Scantron sheet. The first 15 questions are attached. The remaining questions will be handed out later in the exam period. If there is no disruption during the exam period, you can keep working on the first 15 questions after the second module (questions 16 to 30) is handed out. If there is a disruption, each module will be deemed completed after 40 minutes. You are allowed to have one page of notes (8½ by 11 inches, one sheet of paper written on the front side only, 10 point minimum font size or equivalent if handwritten) which must be turned in with your exam. You can also use a handheld calculator. 1. Which of the following statements is false? a. Risk and return have historically shown a positive relationship. b. Standard deviation and variance are measures of risk. c. Risky assets always have a positive risk premium. d. The greater the risk an investor assumes, the greater the expected return. e. On average, there is a reward for bearing risk. Ch 1 and 2: Risk and return 2. You own a risky asset with an expected return of 12% and a standard deviation of 20%. If the returns are normally distributed, the approximate probability of receiving a return greater than 72%, or less than -48% is: a. 95% b. 1% c. 99% d. 5% e. 16% Ch 1: Normal Distribution. Page 17 -48% to 72% interval is ± 3 standard deviations from the mean: 99% P(R>72%) or P(R<-48%) = 1% 3. Which of the following assets cannot lie on the Markowitz efficient frontier? a. Expected return = 24%; Standard deviation = 67%
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b. Expected return = 20%; Standard deviation = 59% c. Expected return = 18%; Standard deviation = 62% d. Expected return = 12%; Standard deviation = 45% e. All of the assets can lie on the Markowitz efficient frontier Ch 2: Lower return and higher standard deviation versus (b) 4. Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 18% and a standard deviation of 40%. The correlation between the expected returns on Stocks A and B is zero. You construct a portfolio consisting of long positions in Stocks A and B and compute the portfolio standard deviation to be 28.64%. What is the weight of Stock A in the portfolio? a. 70% b. 60% c. 50% d. 40% e. 30% Ch 2: With zero correlation: σ 2 AB = w A 2 σ A 2 + w B 2 σ B 2 Let w B = 1-w A ; (.2864) 2 = w A 2 .2 2 + (1-w A ) 2 .4 2 ; Solve for w A = 30% If you do not want to use the quadratic formula, then do trial and error with the five responses. 5.
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This note was uploaded on 05/01/2011 for the course ADMS 3531 taught by Professor Profp during the Winter '10 term at York University.

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Winter 2010 Midterm solutions.W11 - Name: _ Student Number:...

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