Problem 1. Efficient portfolios are portfolios that:
(A) Offer the highest rate of return for the same amount of risk.
(B) Offer the lowest rate of return for the same amount of risk.
(C) Offer the lowest amount of risk for the same amount of return.
(D) Both A and C
Problem 2. If IS and DS are combined in a portfolio with 50% invested in each, the expected return and risk would be:
(A) 5.625%; 37.2%
(B) 4.5%; 5.48%
(C) 8.0%; 8.2%
(D) 5.0%; 0%
Problem 3. Monthly returns for the last 5 years for each of two securities have been plotted on the same graph. If these two securities rose and fell in similar patterns, what correlation did the securities have?
(A) No correlation
(B) A weak negative correlation
(C) A strong negative correlation
(D) A strong positive correlation
Problem 4. The combination of the efficient set of portfolios with a risk-less lending and borrowing rate results in which market line?
(A) The capital market line which shows that all investors will invest only in the risk-less asset.
(B) The capital market line which shows that all investors will invest in a combination of the risk-less asset and the tangency portfolio.
(C) The security market line which shows that all investors will invest only in the risk-less asset.
(D) The security market line which shows that all investors will invest in a combination of the risk-less asset and the tangency portfolio.
Problem 5. A portfolio contains four assets as show below:
Asset Beta Percent of Portfolio
1 .8 30%
2 1.1 30%
3 1.5 20%
4 1.6 20%
If the risk-less rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio, the expected return on the portfolio and the market?
(A) 1.19 6.57 6
(B) 1.19 7.14 6
(C) 1.19 10.14 9
(D) 1.25 10.5 6
Problem 6. Stock A has an expected return of 20%, and Stock B has an expected return of 4%. However, the risk of Stock A as measured by its variance is 3 times that of Stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?
(A) 4%
(B) 12%
(C) 20%
(D) Greater than 20%
Problem 7. Correlation measures the:
(A) Size of return movements of individual securities.
(B) Size of return movements between two securities.
(C) Directional movement of an individual securities.
(D) Directional movement between the return of two securities
Problem 8. The SML relates:
(A) Expected return to standard deviation.
(B) Expected return of securities to expected return of portfolios.
(C) Efficient sets of portfolios to the risk-free rate.
(D) Expected return to beta
Problem 9. When stocks with the same expected return are combined into a portfolio, what is the relationship between the expected return of the portfolio and the average expected return of the stocks?
(A) The expected return of the portfolio is less.
(B) The expected return of the portfolio is greater.
(C) The expected returns are equal.
(D) There is no relationship.
Problem 10. Covariance measures the interrelationship between two securities in terms of:
(A) Both expected return and direction of return movement.
(B) Both size and direction of return movement.
(C) The standard deviation of returns.
(D) Both expected return and size of return movements