1. The term excess-return refers to ______________.
A. returns earned illegally by means of insider trading
B. the difference between the rate of return earned and the risk-free rate
C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk
D. the portion of the return on a security which represents tax liability and therefore cannot be reinvested
2. 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
3. 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%
4. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.
A. the returns on the stock and bond portfolio tend to move inversely
B. the returns on the stock and bond portfolio tend to vary independently of each other
C. the returns on the stock and bond portfolio tend to move together
D. the covariance of the stock and bond portfolio will be positive
5. You are considering adding a new stock, A, to the portfolio B. Stock A has a standard deviation of return of 35% while portfolio B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. You already have 600,000 invested in portfolio B and you are going to invest 400,000 in Stock A. The standard deviation of the new portfolio is _________.
A. 23.00%
B. 19.76%
C. 18.45%
D. 17.67%
6. Which of the following provides the best example of a systematic risk event?
A. A strike by union workers hurts a firm's quarterly earnings.
B. Mad Cow disease in Montana hurts local ranchers and buyers of beef.
C. The Federal Reserve increases interest rates 50 basis points.
D. A senior executive at a firm embezzles $10 million and escapes to South America.
7. 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 when market is efficient?
A. 6%
B. 15.6%
C. 18%
D. 21.6%
8. 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
9. You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta?
A. 1.048
B. 1.033
C. 1.000
D. 1.037
10. 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
11. Consider the following two stocks, A and B. Stock A has an expected return of 10%, 10% standard deviation, and a beta of 1.20. Stock B has an expected return of 14%, 25% standard deviation, and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy if we are building a portfolio because _________.
A. A, it offers better Sharpe ratio
B. A, it offers better alpha
C. B, it offers better alpha
D. B, it offers better Sharpe ratio
12. 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
13. You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____.
A. 4.00%
B. 3.50%
C. 7.00%
D. 11.00%
14. The geometric average of -12%, 20% and 25% is _________.
A. 8.42%
B. 11.00%
C. 9.70%
D. 18.88%
15. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return and a 10% chance of losing 3%. What is the standard deviation of this investment?
A. 5.14%
B. 7.59%
C. 9.29%
D. 8.43%
16. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe measure of ____.
A. 0.22
B. 0.60
C. 0.42
D. 0.25
17. An investor invests 70% of her wealth in a risky asset with an expected rate of return of 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. 10.0%, 6.7%
B. 12.0%, 22.4%
C. 12.0%, 15.7%
D. 10.0%, 35.0%
18. According to the semi-strong form of the efficient markets hypothesis ____________.
A. stock prices do not rapidly adjust to new information
B. future changes in stock prices cannot be predicted from any information that is publicly available
C. corporate insiders should have no better investment performance than other investors even if allowed to trade freely
D. arbitrage between futures and cash markets should not produce extraordinary profits
19. Important characteristic(s) of market efficiency is that _________________.
I. there are no arbitrage opportunities
II. security prices react quickly to new information
III. active trading strategies will not consistently outperform passive strategies
A. I only
B. II only
C. I and III only
D. I, II and III
20. The semi-strong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.
A. Technical analysis cannot; fundamental analysis can
B. Technical analysis can; fundamental analysis can
C. Technical analysis can; fundamental analysis cannot
D. Technical analysis cannot; fundamental analysis cannot
21. You are looking to invest in one of three stocks. Stock A has high expected earnings growth, Stock B has only modest expected earnings growth and Stock C is expected to generate poor earnings growth. Which stock is likely to generate the greatest alpha for you?
A. Stock A
B. Stock B
C. Stock C
D. You cannot tell from the information given
22. Fundamental analysis is likely to yield best results for _______.
A. NYSE stocks
B. neglected stocks
C. stocks that are frequently in the news
D. fast growing companies
23. When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.
A. positive; positive
B. positive; negative
C. negative; positive
D. positive; zero
24. You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.
A. limit-buy order
B. limit-sell order
C. market order
D. stop-loss order
25. The Dow Jones Industrial Average is _________.
A. a price weighted average
B. a value weight and average
C. an equally weighted average
D. an unweighted average
26. You have calculated the historical dollar weighted return, annual geometric average return and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?
A. Dollar weighted return
B. Geometric average return
C. Arithmetic average return
D. Index return
27. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions you should calculate the __________.
A. geometric average return
B. arithmetic average return
C. dollar weighted return
D. index return