mid_questions_09_Sample - MGT330 Midterm Exam Sample 1 1(5...

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MGT330 Midterm Exam: Sample 1 1. (5 points) Which of the following statements about portfolio diversi fi cation is correct ? (Just circle the right answer. No explanation required for this question.) (a) The risk-reducing bene fi ts of diversi fi cation do not occur meaningfully until at least 30 individual securities are included in the portfolio. (b) Diversi fi cation reduces the portfolio’s expected return because diversi fi cation reduces a portfolio’s total risk. (c) Proper diversi fi cation can reduce or eliminate systematic risk. (d) As more securities are added to a portfolio, total risk typically would be expected to fall at a decreasing rate. (e) Diversi fi cation can not be e ff ective if asset returns are correlated with each other. 2. (6 points) To buy low and sell high, we can simply use a market order to buy at the bid price and use another market order to sell at the ask price. True or false? Explain brie fl y. 3. (7 points) One of the most popular technical indicators is the short interest. What is the short interest? Explain why it may be interpreted as a bullish signal. 4. (7 points) In their FAJ (2000) article (entitled “Does asset allocation policy explain 40, 90, or 100 percent of performance?”), Ibbotson and Kaplan fi nd that about 40 percent of the time variation in returns of a typical fund is explained by asset allocation policy. True or false? Explain brie fl y. 5. (10 points) The fact that specialists have access to limit order books is precisely the reason why the adverse selection component of the bid-ask spread reacts to earnings announcements. True or false? Explain carefully. 6. (10 points) To allocate between two risky assets, the optimal portfolio is always the portfolio that has the highest Sharpe ratio. True or false? Explain carefully. 7. (10 points) Regression analyses have shown that dividend-price and earnings-price ratios appear to predict future stock returns. Give one story which might explain this fi nding. 8. Consider the problem of allocating between the stock market and a riskless asset for three investors (having quadratic utility functions), with the investment horizon of 5 year, 10 year, and 15 year, respectively. For the stock market returns, let ˜ r 1 be the stock market return over the next fi ve year, ˜ r 2 be the return over the fi ve year period from year 6 to 10, and ˜ r 3 be the return over the fi ve year period from year 11 to 15. The riskless rate for each of the 1
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three fi ve-year intervals is r f . The three investors have the same degree of risk aversion. The correlations between the returns are corr(˜ r 1 , ˜ r 2 ) = 0 . 2 , corr(˜ r 2 , ˜ r 3 ) = 0 . 2 , corr(˜ r 1 , ˜ r 3 ) = 0 . 1 . Like in our class discussion, you can assume that E r 1 ) = E r 2 ) = E r 3 ) = ¯ r var(˜ r 1 ) = var(˜ r 2 ) = var(˜ r 3 ) = σ 2 where ¯ r and σ 2 are some unknown numbers.
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