Test 2 Practice Progl

1. The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend what is the holding period return for the year? 
A. 6.58%
B. 8.86%
C. 14.47%
D. 18.66%

14.47%

2. The arithmetic average of -11%, 15% and 20% is ________. 
A. 15.67%
B. 8.00%
C. 11.22%
D. 6.45%

B. 8.00%

3. What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%, respectively? 
A. 3.72%
B. 4.23%
C. 4.74%
D. 4.90%

C. 4.74%

 4. Annual percentage rates can be converted to effective annual rates by means of the following formula: 
A. (1 + (APR/n))^n - 1
B. (APR)^(n)
C. (APR/n)
D. (periodic rate)^(n)

A. (1 + (APR/n))^n - 1

5. Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in six months. What is the effective annual rate of return for this investment? 
A. 6.38%
B. 12.77%
C. 13.17%
D. 14.25%

C. 13.17%

6. The expected rates of return of stocks A and B are _______and, respectively.

A. 13.2%; 9%.

B. 14%; 10%

C. 13.2%; 7.7%

D. 7.7%; 13.2%

E. none of the above

C. 13.2%; 7.7%

7. The standard deviations of stocks A and B are _______and, respectively.

A. 1.50%; 1.91%

B. 2.50%; 1.10%

C. 3.25%; 2.00%

D. 1.47%; 1.10%

E. none of the above

D. 1.47%; 1.10%

8. The coefficient of correlation between A and B is

A. 0.47.

B. 0.60.

C. 0.58

D. 1.20.

E. none of the above.

A. 0.47.

9. If you invest 40% of your money in A and 60% in B, what would be your portfolio’s expected rate of return and standard deviation?

A. 9.9%; 3%

B. 9.9%; 1.1%

C. 11%; 1.1%

D. 11%; 3%

E. none of the above

B. 9.9%; 1.1%

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with 2 risky securities, A and B. The weights of A and B in P are 0.60 and 0.40, respectively. A has an expected rate of return of 0.14 and variance of 0.01, and B has an expected return of 0.10 and a variance of 0.0081.

 

10.  If you desire to form a portfolio with an expected rate of return of 0.11, what percentages of your money must you invest in the T-bill and P, respectively?

A. 0.25; 0.75

B. 0.19; 0.81

C. 0.65; 0.35

D. 0.50; 0.50

E. cannot be determined

B. 0.19; 0.81

11. If you desire to form a portfolio with an expected rate of return of 0.10, what percentages of your money must you invest in the T-bill, A, and B, respectively if you keep A and B in the same proportion to each other as in portfolio P?

A. 0.25; 0.45; 0.30

B. 0.19; 0.49; 0.32

C. 0.32; 0.41; 0.27

D. 0.50; 0.30; 0.20

E. cannot be determined

C. 0.32; 0.41; 0.27

12. What would be the dollar value of your position in A and B, respectively, if you decide to hold 40% percent of your money in the risky portfolio and 60% in T-bills?

A. $240; $360

B. $360; $240

C. $100; $240

D. $240; $160

E. cannot be determined.

D. $240; $160

Part 1

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a treasury bill with a rate of return of 6%.       

 

13. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%. 
A. 100%
B. 90%
C. 45%
D. 10%

C. 45%

Part 2

 

 14.  A portfolio that has an expected value in one year of $1,100 could be formed if you _________. 
A. Place 40% of your money in the risky portfolio and the rest in the risk free asset
B. Place 55% of your money in the risky portfolio and the rest in the risk free asset
C. Place 60% of your money in the risky portfolio and the rest in the risk free asset
D. Place 75% of your money in the risky portfolio and the rest in the risk free asset

A. Place 40% of your money in the risky portfolio and the rest in the risk free asset

Part 3

 15. The slope of the capital allocation line formed with the risky asset and the risk-free asset is _________. 
A. 1.40
B. 0.80
C. 0.50
D. 0.40

C. 0.50

16. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the Sharpe ratio? 
A. 0.40
B. 0.50
C. 0.75
D. 0.80

A. 0.40

17. Consider a treasury bill with a rate of return of 5% and the following risky securities:
Security A: E(r) = .15; variance = .0400
Security B: E(r) = .10; variance = .0225
Security C: E(r) = .12; variance = .1000
Security D: E(r) = .13; variance = .0625
The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of his complete portfolio to achieve the best CAL would be _________. 
A. security A
B. security B
C. security C
D. security D

A. security A

18. If nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? 
A. 3.92%
B. 4.00%
C. 4.12%
D. 6.00%

A. 3.92%

19. An investor's degree of risk aversion will determine his or her ______. 
A. optimal risky portfolio
B. risk-free rate
C. optimal mix of the risk-free asset and risky asset
D. capital allocation line

C. optimal mix of the risk-free asset and risky asset

20. The risk that can be diversified away is __________. 
A. beta
B. firm specific risk
C. market risk
D. systematic risk

B. firm specific risk

21. Market risk is also called __________ and _________. 
A. systematic risk, diversifiable risk
B. systematic risk, nondiversifiable risk
C. unique risk, nondiversifiable risk
D. unique risk, diversifiable risk

B. systematic risk, nondiversifiable risk

22. The standard deviation of return on investment A is .15 while the standard deviation of return on investment B is .10. If the covariance of returns on A and B is .005, the correlation coefficient between the returns on A and B is _________. 
A. 0.12
B. 0.33
C. 0.50
D. 0.77

B. 0.33

23. The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________. 
A. -.0447
B. -.0020
C. .0020
D. .0447

B. -.0020

24. Diversification is most effective when security returns are _________. 
A. high
B. negatively correlated
C. positively correlated
D. uncorrelated

B. negatively correlated

25. Which of the following correlations coefficients will produce the least diversification benefit? 
A. -0.6
B. -0.3
C. 0.0
D. 0.8

D. 0.8

26. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. 
A. 23.00%
B. 19.76%
C. 18.45%
D. 17.67%

B. 19.76%

27. You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be ________________. 
A. more than 18% but less than 24%
B. equal to 18%
C. more than 12% but less than 18%
D. equal to 12%

C. more than 12% but less than 18%

28. The optimal risky portfolio can be identified by finding ____________.
I. the minimum variance point on the efficient frontier
II. the maximum return point on the efficient frontier
III. the tangency point of the capital market line and the efficient frontier
IV. the line with the steepest slope that connects the risk free rate to the efficient frontier 
A. I and II only
B. II and III only
C. III and IV only
D. I and IV only

C. III and IV only

29. On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. 
A. left and above
B. left and below
C. right and above
D. right and below

A. left and above

30. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. 
A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs
B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile
C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion
D. choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate

C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

31. Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to changes in the market as the returns of Stock B. 
A. 20% more
B. slightly more
C. 20% less
D. slightly less

A. 20% more

32. If the beta of the market index is 1.0 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index? 
A. 0.8
B. 1.0
C. 1.2
D. 1.5

B. 1.0

33. A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the stock is 35%. What is the stock's beta? 
A. 1.00
B. 0.75
C. 0.60
D. 0.55

B. 0.75

34. In the context of the capital asset pricing model, the systematic measure of risk is captured by _________. 
A. unique risk
B. beta
C. standard deviation of returns
D. variance of returns

B. beta

35. Which of the following are assumptions of the simple CAPM model?
I. Individual trades of investors do not affect a stock's price
II. All investors plan for one identical holding period
III. All investors analyze securities in the same way and share the same economic view of the world
IV. All investors have the same level of risk aversion 
A. I, II and IV only
B. I, II and III only
C. II, III and IV only
D. I, II, III and IV

B. I, II and III only

36. Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3? 
A. 6%
B. 15.6%
C. 18%
D. 21.6%

D. 21.6%

37. You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________. 
A. 1.14
B. 1.20
C. 1.26
D. 1.50

C. 1.26

38. According to the capital asset pricing model, a security with a _________. 
A. negative alpha is considered a good buy
B. positive alpha is considered overpriced
C. positive alpha is considered underpriced
D. zero alpha is considered a good buy

C. positive alpha is considered underpriced

39. Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________. 
A. fairly priced
B. overpriced
C. underpriced
D. None of the above

B. overpriced

40. Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which advisor was the better stock picker? 
A. Advisor A was better because he generated a larger alpha
B. Advisor B was better because he generated a larger alpha
C. Advisor A was better because he generated a higher return
D. Advisor B was better because he achieved a good return with a lower beta

A. Advisor A was better because he generated a larger alpha

41. The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________. 
A. SDA Corp. stock is underpriced
B. SDA Corp. stock is fairly priced
C. SDA Corp. stock's alpha is -0.75%
D. SDA Corp. stock alpha is 0.75%

C. SDA Corp. stock's alpha is -0.75%

42. Consider the multi-factor APT with two factors. Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. 
A. 13.5%
B. 15.0%
C. 16.25%
D. 23.0%

C. 16.25%

43. The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP changes is 6% and the firm has a beta relative to GDP of 1.2. If the risk free rate is 4.0%, what is the expected return on this stock? 
A. 10.0%
B. 11.5%
C. 13.6%
D. 14.0%

C. 13.6%

44. Which of the following variables do Fama and French claim do a better job explaining stock returns than beta?
I. Book to market ratio
II. Unexpected change in industrial production
III. Firm size 
A. I only
B. I and II only
C. I and III only
D. I, II and III

C. I and III only

45. The possibility of arbitrage arises when ____________. 
A. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily
B. mis-pricing among securities creates opportunities for riskless profits
C. two identically risky securities carry the same expected returns
D. investors do not diversify

B. mis-pricing among securities creates opportunities for riskless profits

46. According to the capital asset pricing model, a fairly priced security will plot _________. 
A. above the security market line
B. along the security market line
C. below the security market line
D. at no relation to the security market line 

B. along the security market line

47. The SML is valid for _______________ and the CML is valid for ______________. 
A. only individual assets; well diversified portfolios only
B. only well diversified portfolios; only individual assets
C. both well diversified portfolios and individual assets; both well diversified portfolios and individual assets
D. both well diversified portfolios and individual assets; well diversified portfolios only

D. both well diversified portfolios and individual assets; well diversified portfolios only

48. The measure of unsystematic risk can be found from an index model as _________. 
A. residual standard deviation
B. R-square
C. degrees of freedom
D. sum of squares of the regression

A. residual standard deviation

49. Standard deviation of portfolio returns is a measure of ___________. 
A. total risk
B. relative systematic risk
C. relative non-systematic risk
D. relative business risk

A. total risk

50. One of the main problems with the arbitrage pricing theory is __________. 
A. its use of several factors instead of a single market index to explain the risk-return relationship
B. the introduction of non-systematic risk as a key factor in the risk-return relationship
C. that the APT requires an even larger number of unrealistic assumptions than the CAPM
D. the model fails to identify the key macroeconomic variables in the risk-return relationship

D. the model fails to identify the key macroeconomic variables in the risk-return relationship