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# Additional Practice for COMM371 1. The four following portfolios are traded at the same time. Portfolio I J K L Expected Return 8% 16% 15% 25%

This is a pratice final exam for my course, and it is provided with answers.
The problem is that I don't understand some problems even after looking at the answers: problem 2 part (d) in page 4 and problem 3 part (a) and part (b) in page 5. Could you explain these questions more in depth? The answers provided are not in detail.

1 Additional Practice for COMM371 1. The four following portfolios are traded at the same time. Portfolio Expected Return Standard Deviation I 8% 10% J 16% 20% K 15% 25% L 25% 38% Which one of them does not lie on the efficient frontier? A) Portfolio I B) Portfolio J C) Portfolio K D) Portfolio L E) None of the above 2. You have \$500,000 available to invest in a risk free security and a stock (you can be long or short on both securities) for a one year period. The risk-free rate is 8% p.a. . The expected return on a risky portfolio is 16% for a period of one year. If you wish to earn an expected 22% return for the one-year period, you should A) invest \$125,000 in the risk-free asset B) invest \$375,000 in the risk-free asset C) borrow \$125,000 D) borrow \$375,000 E) None of the above 3. The term structure is flat at 4% (APR annual compounding) and will remain unchanged for the foreseeable future. Consider a three years bond with face value equal to \$100 and an annual coupon of \$5. A forward contract is written on this bond and has a maturity of two years. Assuming the forward transaction is executed just after the second bond’s coupon gets paid, the no arbitrage forward price is closest to A) 94.5 B) 102.2 C) 92.56 D) 92 E) None of the above
2 4. Assume that a typical technology stock has a standard deviation of returns equal to 50% per year, and that all technology stocks returns are uncorrelated with each other. If the typical blue-chip stock has a standard deviation of 10% per year, then what is the minimum number of different technology stocks you would have to include in an equally weighted portfolio to make the tech stock portfolio safer (in terms of standard deviation) than holding a single blue-chip stock? A) 20 B) 30 C) 35 D) 25 E) None of the above 5. A triple A publicly traded firm (very good credit quality) has a positive beta. No dividend is scheduled for the next month. Which of its securities has the highest systematic risk? A) Its common stocks B) Its bonds C) A portfolio that contains its common stock and a European put on it (at the money, one month maturity). D) Its European put options (at the money, one month maturity) E) Its European call options (at the money, one month maturity) 6. With the stock at \$15 per share, an investor desires the following payoff structure. Assuming all options are European, this can be achieved by A) Long the stock, long a put (X=20), short a call (X=10). B) Buy a bond with face value=10, short a call(X=10), long a call(X=20) C) Buy a bond with face value=20, long a put(X=10), short a put(X=20). D) Buy a Bond with face value=20, short 2 puts (X=10), short 2 puts (X=20) E) None of the above
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