FINA 4320 exam 2 review

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________.

expected returns to fall; risk premiums to fall

The normal distribution is completely described by its _______.

mean and standard deviation

Investors require a risk premium as compensation for bearing ______________.

systematic risk

You invest $10,000 in a complete portfolio. The complete portfolio is composed of a 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%?

$6,000

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

-1

Which of the following correlation coefficients will produce the least diversification benefit?

0.8

Based on the picture, what is the expected return on the market ?

10%

Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment?

12.24%

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 13%. What is the expected return on a stock with a beta of 1.4?

15.8%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

19.76%

You purchased a share of stock for $53. One year later you received $3.00 as dividend and sold the share for $52. Your holding-period return was _________.

3.77%

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?

9.2%

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Advisor A was better because he generated a larger alpha.

Based on the outcomes in the following table, choose which of the statements below is (are) correct? Scenario Security A Security B Security C Recession Return > E(r) Return = E(r) Return < E(r) Normal Return = E(r) Return = E(r) Return = E(r) Boom Return < E(r) Return = E(r) Return > E(r) I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive.

I and II only

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size

I and III only

Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion.

I, II, and III only

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

III and IV only

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) PortfolioExpectedReturnBetaA 18% 0.8 Market 18% 1.0 B) PortfolioExpectedReturnStandardDeviationA 21% 8%Market 16% 16% C) PortfolioExpectedReturnBetaA 21% 0.8 Market 16% 1.0 D) PortfolioExpectedReturnBetaA 24.5% 1.5 Market 18% 1.0

Option D

Which of the following provides the best example of a systematic-risk event?

The Federal Reserve increases interest rates 50 basis points.

The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

Treasury bills; risky assets

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

asset A

You run a regression of a stock's returns versus a market index and find the following: Coefficients Lower 95% Upper 95% Intercept 0.789 -1.556 3.457 Slope 0.890 0.6541 1.465 Based on the data, you know that the stock _____.

has a beta that is likely to be anything between .6541 and 1.465 inclusive

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.

increase the unsystematic risk of the portfolio

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 _________.

overpriced

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

requires a risk premium to take on the risk

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________.

security A

The market risk premium is defined as __________.

the difference between the return on an index fund and the return on Treasury bills

The complete portfolio refers to the investment in _________.

the risk-free asset and the risky portfolio combined

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

up; left