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Practice 1 - Copy-2

1. The document contains 11 multiple choice questions about finance and investment concepts such as holding period return, expected return, risk, diversification, the capital market line, and the capital asset pricing model. 2. Questions cover topics like calculating holding period return, determining expected return given a probability distribution of returns, benefits of diversification, components of portfolio variance, properties of indifference curves, maximizing utility, and identifying the optimal portfolio for a risk-averse investor. 3. The last few questions address the capital asset pricing model directly, including identifying characteristics of the market portfolio and calculating alpha based on given expected returns, betas, and risk-free rates.

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44 views12 pages

Practice 1 - Copy-2

1. The document contains 11 multiple choice questions about finance and investment concepts such as holding period return, expected return, risk, diversification, the capital market line, and the capital asset pricing model. 2. Questions cover topics like calculating holding period return, determining expected return given a probability distribution of returns, benefits of diversification, components of portfolio variance, properties of indifference curves, maximizing utility, and identifying the optimal portfolio for a risk-averse investor. 3. The last few questions address the capital asset pricing model directly, including identifying characteristics of the market portfolio and calculating alpha based on given expected returns, betas, and risk-free rates.

Uploaded by

Maggie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Practice 1

Question 1
• You purchase a share of Boeing stock for $90. One year later, after receiving a
dividend of $3, you sell the stock for $92. What was your holding-period return?

A) 4.44%
B) 2.22%
C) 3.33%
D) 5.56%
E) None of the options are correct.
Question 2
• You have been given this probability distribution for the holding-period return for
GM stock:
Stock of the Economy Probability HPR
Boom 0.40 30%
Normal growth 0.40 11%
Recession 0.20 -10%

What is the expected holding-period return for GM stock?


A) 10.4%
B) 11.4%
C) 12.4%
D) 13.4%
E) 14.4%
Question 3
• Other things equal, diversification is most effective when

A) securities' returns are uncorrelated.


B) securities' returns are positively correlated.
C) securities' returns are high.
D) securities' returns are negatively correlated.
E) securities' returns are positively correlated and high.
Question 4
• The variance of a portfolio of risky securities

A) is a weighted sum of the securities' variances.


B) is the sum of the securities' variances.
C) is the weighted sum of the securities' variances and covariances.
D) is the sum of the securities' covariances.
E) None of the options are correct.
Question 5
• In the mean-standard deviation graph, an indifference curve has a ________
slope.

A) negative
B) zero
C) positive
D) vertical
E) Cannot be determined.
Question 6
• Assume an investor with the following utility function: U = E(r) – 3/2 * s 2.

To maximize her expected utility, she would choose the asset with an expected
rate of return of _______ and a standard deviation of ________, respectively.

A) 12%; 20%
B) 10%; 15%
C) 10%; 10%
D) 8%; 10%
Question 7
• Consider a T-bill with a rate of return of 5% and the following risky securities:

Security A: E(r) = 0.15; Variance = 0.04


Security B: E(r) = 0.10; Variance = 0.0225
Security C: E(r) = 0.12; Variance = 0.01
Security D: E(r) = 0.13; Variance = 0.0625

From which set of portfolios, formed with the T-bill and any one of the four risky securities,
would a risk-averse investor always choose his portfolio?

A) The set of portfolios formed with the T-bill and security A.


B) The set of portfolios formed with the T-bill and security B.
C) The set of portfolios formed with the T-bill and security C.
D) The set of portfolios formed with the T-bill and security D.
E) Cannot be determined.
Question 8
You invest $100 in a risky asset with an expected rate of return of 0.12 and a
standard deviation of 0.15 and a T-bill with a rate of return of 0.05.

A portfolio that has an expected outcome of $115 is formed by


A. investing $100 in the risky asset.
B. investing $80 in the risky asset and $20 in the risk-free asset.
C. borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky asset.
D. investing $43 in the risky asset and $57 in the riskless asset.
E. Such a portfolio cannot be formed.
Question 9
• According to the Capital Asset Pricing Model (CAPM), a well diversified
portfolio's rate of return is a function of

A) beta risk.
B) unsystematic risk.
C) unique risk.
D) reinvestment risk.
E) None of the options are correct.
Question 10
• Which statement is true regarding the market portfolio?

I) It includes all publicly traded financial assets.


II) It lies on the efficient frontier.
III) All securities in the market portfolio are held in proportion to their market values.
IV) It is the tangency point between the capital market line and the indifference curve.

A) I only
B) II only
C) III only
D) IV only
E) I, II, and III
Question 11
• Security A has an expected rate of return of 0.10 and a beta of 1.3. The market
expected rate of return is 0.10, and the risk-free rate is 0.04. The alpha of the
stock is

A) 1.7%.
B) –1.8%.
C) 8.3%.
D) 5.5%.

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