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**Unformatted text preview: **MGT330MidtermExam:Sample1 1.(5points)Whichofthefollowingstatementsaboutportfoliodiversi cationis correct ? (Justcircletherightanswer.Noexplanationrequiredforthisquestion.) (a)Therisk-reducingbene tsofdiversi cationdonotoccurmeaningfullyuntilatleast30 individualsecuritiesareincludedintheportfolio. (b)Diversi cationreducestheportfoliosexpectedreturnbecausediversi cationreducesa portfoliostotalrisk. (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(entitledDoesassetallocationpolicyexplain40,90,or 100percentofperformance?),IbbotsonandKaplan ndthatabout40percentofthetime variationinreturnsofatypicalfundisexplainedbyassetallocationpolicy. Trueorfalse?Explainbrie y. 5.(10points)Thefactthatspecialistshaveaccesstolimitorderbooksispreciselythereason 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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