Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) You invest $10,000 in a complete portfolio. The complete portfolio is composed of a 1)

risky asset with an expected rate of return of 15% and a standard deviation of 21% and
a Treasury bill with a rate of return of 5%. How much money should be invested in the
risky asset to form a portfolio with an expected return of 11%?
A) $3,000 B) $7,000 C) $4,000 D) $6,000

2) In the mean standard deviation graph, the line that connects the risk-free rate and the 2)
optimal risky portfolio, P, is called the _________.
A) investor's utility line B) capital allocation line
C) indifference curve D) security market line

3) The complete portfolio refers to the investment in ________. 3)

A) the risk-free asset
B) the risky portfolio
C) the risky portfolio and the index
D) the risk-free asset and the risky portfolio combined

4) You are considering investing $1,000 in a complete portfolio. The complete portfolio is 4)
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two
risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%,
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. If you decide to hold 25% of your complete portfolio in the risky
portfolio and 75% in the Treasury bills, then the dollar values of your positions in X
and Y, respectively, would be ________ and ________.
A) $100; $150 B) $300; $450 C) $150; $100 D) $450; $300

5) You are considering investing $1,000 in a complete portfolio. The complete portfolio is 5)
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two
risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%,
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be
________, ________, and ________, respectively, if you decide to hold a complete
portfolio that has an expected return of 8%.
A) $595; $162; $243 B) $162; $595; $243
C) $243; $162; $595 D) $595; $243; $162

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 6) You have $500,000 available to invest. The risk-free rate, as well as your borrowing 6)
rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return,
you should ________.
A) invest $125,000 in the risk-free asset
B) borrow $375,000
C) borrow $125,000
D) invest $375,000 in the risk-free asset

7) You are considering investing $1,000 in a complete portfolio. The complete portfolio is 7)
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two
risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%,
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. To form a complete portfolio with an expected rate of return of 11%, you
should invest ________ of your complete portfolio in Treasury bills.
A) 25% B) 19% C) 50% D) 36%

8) An investor invests 70% of her wealth in a risky asset with an expected rate of return of 8)
15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her
portfolio's expected rate of return and standard deviation are _________ and _________
respectively.
A) 10%; 6.7% B) 12%; 15.7% C) 12%; 22.4% D) 10%; 35%

9) The CAL provided by combinations of 1-month T-bills and a broad index of common 9)
stocks is called the ________.
A) total return line B) CML
C) SML D) CAPM

10) You are considering investing $1,000 in a complete portfolio. The complete portfolio is 10)
composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two
risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. To form a complete portfolio with an expected rate of return of 8%, you
should invest approximately ________ in the risky portfolio. This will mean you will
also invest approximately ________ and ________ of your complete portfolio in
security X and Y, respectively.
A) 40%; 24%; 16% B) 0%; 60%; 40%
C) 50%; 30%; 20% D) 25%; 45%; 30%

11) You invest $1,000 in a complete portfolio. The complete portfolio is composed of a 11)
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%. The slope of the capital allocation line
formed with the risky asset and the risk-free asset is approximately ________.
A) .25 B) .50 C) 1.040 D) .80

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12) You invest $1,000 in a complete portfolio. The complete portfolio is composed of a 12)
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%. ________ 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) 10% C) 45% D) 90%

13) The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's 13)
borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%.
If the standard deviation on the complete portfolio is 25%, the expected return on the
complete portfolio is ________.
A) 6% B) 10% C) 16.25% D) 8.75 %

14) You invest $1,000 in a complete portfolio. The complete portfolio is composed of a 14)
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%. A portfolio that has an expected value in 1
year of $1,100 could be formed if you _________.
A) place 55% of your money in the risky portfolio and the rest in the risk-free asset
B) place 40% 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

15) Annual percentage rates can be converted to effective annual rates by means of the 15)
following formula:
A) (APR)(n) B) (APR/n)
C) (periodic rate)(n) D) [1 + (APR/n)]n - 1

16) If you want to measure the performance of your investment in a fund, including the 16)
timing of your purchases and redemptions, you should calculate the ________.
A) arithmetic average return B) index return
C) dollar-weighted return D) geometric average return

17) The holding-period return on a stock was 32%. Its beginning price was $25, and its cash 17)
dividend was $1.50. Its ending price must have been _________.
A) $28.50 B) $31.50 C) $29.75 D) $33.20

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18) You have the following rates of return for a risky portfolio for several recent years. 18)
Assume that the stock pays no dividends.

what is the geometric average return for the period?

A) 2.21% B) 2.87% C) 2.6% D) .74%

19) Two assets have the following expected returns and standard deviations when the 19)
risk-free rate is 5%:

Asset A E (rA) = 10% A = 20%

Asset B E(rB) = 15% B = 27%

An investor with a risk aversion of A = 3 would find that _________ on a risk-return

basis.
A) neither asset A nor asset B is acceptable
B) both asset A and asset B are acceptable
C) only asset B is acceptable
D) only asset A is acceptable

20) Consider the following two investment alternatives: First, a risky portfolio that pays a 20)
20% rate of return with a probability of 60% or a 5% rate of return with a probability of
40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio,
your expected profit would be _________.
A) $7,000 B) $3,000 C) $7,500 D) $10,000

21) In calculating the variance of a portfolio's returns, squaring the deviations from the 21)
mean results in:

I. Preventing the sum of the deviations from always equaling zero

II. Exaggerating the effects of large positive and negative deviations

III. A number for which the unit is percentage of returns

A) I and II only B) I and III only C) I, II, and III D) I only

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22) A security with normally distributed returns has an annual expected return of 18% and 22)
standard deviation of 23%. The probability of getting a return between -28% and 64%
in any one year is ________.
A) 100% B) 95.44% C) 99.74% D) 68.26%

23) The reward-to-volatility ratio is given by ________. 23)

A) the portfolio's excess return
B) the second derivative of the capital allocation line
C) the point at which the second derivative of the investor's indifference curve
reaches zero
D) the slope of the capital allocation line

24) The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. 24)
The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?
A) 9 B) 1 C) .8 D) .6

25) A portfolio with a 25% standard deviation generated a return of 15% last year when 25)
T-bills were paying 4.5%. This portfolio had a Sharpe ratio of _________.
A) .25 B) .60 C) .42 D) .22