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Question Number

Question

1

Which of the following portfolios would be most appropriate for a moderately aggressive investor with an intermediate-term time horizon?

50% money market securities; 5% real estate; 45% precious metals

40% money market securities; 10% real estate; 50% foreign securities

90% small-cap domestic equity securities; 10% collectibles

30% domestic equity securities; 30% fixed-income domestic securities; 20% real estate; 20% foreign securities

2

Overall asset allocation for a portfolio is performed using the expected returns, ________________, and correlations between asset classes.

A. Covariance

B. Standard deviation

C. Weighted average returns

D. Beta

3

Which of the following statements concerning the Markowitz efficient frontier is correct?

A portfolio that offers the highest rate of return with the lowest degree of risk is on the efficient frontier.

A portfolio that offers the lowest rate of return for a higher degree of risk is on the efficient frontier.

A portfolio that offers the lowest degree of risk for a given rate of return is above the efficient frontier.

A portfolio that offers the highest rate of return for a given degree of risk is on the efficient frontier.

4

When a company changes its capital structure, what happens?

The Weighted Average Cost of Captial (WACC) changes

The discount rate does not change

Investors buy or sell shares

Investors perceive the firm as having more risk

I, II, III

II, III, IV

I, III, IV

I, II, IV

5

Assume a portfolio has the following four stocks and associated rates of return:

Stock Rate of Return Invested

M 9.2% 50%

N 11.1% 25%

O 4.4% 15%

P 6.9% 10%

Assume that 50% of the portfolio is invested in Stock M, in Stock N, 25%, in Stock O, 15%, and 10% in Stock P. Based on this information, which of the following is the weighted-average rate of return on the portfolio?

8.03%

8.46%

8.73%

9.05%

For questions # 6, 7 and 8 use the following information. Assume the following information concerning a two-stock portfolio:

Stock X Stock Y

Percent of portfolio 75% 25%

Average annual return 11% 9%

Standard deviation of returns 2.0 3.0

Covariance of returns -5

6

What is the correlation coefficient of Stocks X and Y, based on the above information?

-.5000

-.7169

-.8333

-.9981

7

What is the standard deviation of the portfolio based on the above information?

0.9682

1.0061

4.3177

5.0000

8

Which fo the following facts explains why the standard deviation of the portfolio is less than the standard deviation of either of the two stocks that make up the portfolio?

The fact that Stock X has a lower standard deviation than Stock Y

The fact that the portfolio consists of two stocks rather than one

The fact that Stock Y has a lower average annual return than Stock X

The fact that Stocks X and Y have a negative correlation coefficient

9

Which of the following definitions of investor returns is false?

Can be decided for a given level or risk

Can be determined by using “classical” statistical analysis

Have an investment outcome with the lowest expected risk

Are not based on capital appreciation

10

What is the objective of calculating the standard deviation of an investment portfolio?

Achieve an overall standard deviation that is lower than its component parts

Used for analysis of investment averages

Employed to verify the geometric average

Implemented to determine each stock’s beta

11

Proponents of CAPM have concluded that all of the following are correct EXCEPT one:

CAPM determines the equilibrium

CAPM is capbalble of eliminating unsystematic risk

CAPM can be used for the mean rate of return for any investments using its beta value

CAPM can be used for multiple-period plans

12

A risk-free investment as a beta of zero because its covariance with the makret is zero.

True

False