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**Unformatted text preview: **MGT330MidtermExam:Sample1 1.(5points)Whichofthefollowingstatementsaboutportfoliodiversi ¡ cationis correct ? (Justcircletherightanswer.Noexplanationrequiredforthisquestion.) (a)Therisk-reducingbene ¡ tsofdiversi ¡ cationdonotoccurmeaningfullyuntilatleast30 individualsecuritiesareincludedintheportfolio. (b)Diversi ¡ cationreducestheportfolio’sexpectedreturnbecausediversi ¡ cationreducesa portfolio’stotalrisk. (c)Properdiversi ¡ cationcanreduceoreliminatesystematicrisk. (d)Asmoresecuritiesareaddedtoaportfolio,totalrisktypicallywouldbeexpectedtofall atadecreasingrate. (e)Diversi ¡ cationcannotbee ¢ ectiveifassetreturnsarecorrelatedwitheachother. 2.(6points)Tobuylowandsellhigh,wecansimplyuseamarketordertobuyatthebidprice anduseanothermarketordertosellattheaskprice. Trueorfalse?Explainbrie £ y. 3.(7points)Oneofthemostpopulartechnicalindicatorsistheshortinterest.Whatisthe shortinterest?Explainwhyitmaybeinterpretedasabullishsignal. 4.(7points)IntheirFAJ(2000)article(entitled“Doesassetallocationpolicyexplain40,90,or 100percentofperformance?”),IbbotsonandKaplan ¡ ndthatabout40percentofthetime variationinreturnsofatypicalfundisexplainedbyassetallocationpolicy. Trueorfalse?Explainbrie £ y. 5.(10points)Thefactthatspetshaveaccesstolimitorderbooksispreciselythereason whytheadverseselectioncomponentofthebid-askspreadreactstoearningsannouncements. Trueorfalse?Explaincarefully. 6.(10points)Toallocatebetweentworiskyassets,theoptimalportfolioisalwaystheportfolio thathasthehighestSharperatio. Trueorfalse?Explaincarefully. 7.(10points)Regressionanalyseshaveshownthatdividend-priceandearnings-priceratios appeartopredictfuturestockreturns.Giveonestorywhichmightexplainthis ¡ nding. 8.Considertheproblemofallocatingbetweenthestockmarketandarisklessassetforthree investors(havingquadraticutilityfunctions),withtheinvestmenthorizonof5year,10year, and15year,respectively.Forthestockmarketreturns,let˜ u 1 bethestockmarketreturn overthenext ¡ veyear,˜ u 2 bethereturnoverthe ¡ veyearperiodfromyear6to10,and˜ u 3 bethereturnoverthe ¡ veyearperiodfromyear11to15.Therisklessrateforeachofthe 1 three ¡ ve-yearintervalsis u i .Thethreeinvestorshavethesamedegreeofriskaversion.The correlationsbetweenthereturnsare corr(˜ u 1 > ˜ u 2 )= ¡ = 2 > corr(˜ u 2 > ˜ u 3 )= ¡ = 2 > corr(˜ u 1 > ˜ u 3 )= ¡ = 1 = Likeinourclassdiscussion,youcanassumethat H (˜ u 1 )= H (˜ u 2 )= H (˜ u 3 )=¯ u var(˜ u 1 )=var(˜ u 2 )=var(˜ u 3 )= ¡ 2 where¯ u and ¡ 2 aresomeunknownnumbers. (a)(10points)Iftheoptimalallocationforthe5-yearinvestoris z 1 =0 = 6=60%,whatis theoptimalallocation z 1:2 forthe10-yearinvestor? (b)(15points)Iftheoptimalallocationforthe5-yearinvestoris z 1 =0 = 6=60%,whatis theoptimalallocation z 1:3 forthe15-yearinvestor?(Hereinthisquestion, z ’sreferto optimalallocationstothestockmarket.) 9.Youmanageariskyfundwithanexpectedrateofreturnof15%andastandarddeviationof 30%.TheT-billrateis6%. (a)(3points)Yourclientchoosestoinvest60%ofherwealthinyourfundand40%ina...

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