FIN_3303_SP2011_Test 2 WITH KEY (1)

FIN_3303_SP2011_Test 2 WITH KEY (1) - FIN 3303 Spring 2011...

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FIN 3303 Spring 2011 Test 2 Student ___________________________________________ 1. Suppose Sarah can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios should she hold in combination with a position in the risk-free asset? a. portfolio with a standard deviation of 15% and an expected return of 12% b. portfolio with a standard deviation of 19% and an expected return of 15% c. portfolio with a standard deviation of 25% and an expected return of 18% d. portfolio with a standard deviation of 12% and an expected return of 9% 2. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return? a. 17% b. 12% c. 19.5% d. 24.5% 3. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to a. zero b. the expected risk premium on the market portfolio c. the risk-free rate d. the expected return on the market portfolio 4. According to the CAPM (capital asset pricing model), what is the single factor that explains differences in returns across securities?
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a. the risk-free rate b. the expected risk premium on the market portfolio c. the beta of a security d. the expected return on the market portfolio e. the volatility of a security 5. The stock of Alpha Company has an expected return of 15.5% and a beta of 1.5, and Gamma Company stock has an expected return of 13.4% and a beta of 1.2. Assume the CAPM holds. What’s the expected return on the market? a. 12% b. 7% c. 10.3% d. 11.2% 6. A portfolio has 40% invested in Asset 1, 50% invested in Asset 2 and 10% invested in Asset 3. Asset 1 has a beta of 1.2, Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8, what’s the beta of the portfolio? a. 1.27 b. 0.80 c. 1.06 d. 1.20 e. Cannot tell from given information
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7. You have the following data on the securities of three firms: Return last year Beta Firm A 10% 0.8 Firm B 11% 1.0 Firm C 12% 1.2 If the risk-free rate last year was 3%, and the return on the market was 11%, which firm had the best performance on a risk-adjusted basis? a. Firm A b. Firm B c. Firm C d. There is no difference in performance on a risk-adjusted basis 8. A disadvantage of the probabilistic approach to estimating an asset’s returns is: a. history always repeats itself. b. it does not require one to assume that the future will look like the past.
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FIN_3303_SP2011_Test 2 WITH KEY (1) - FIN 3303 Spring 2011...

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