FINA4310 - Test 2

In a portfolio of two asstets what must be true of the correlation coefficient between their returns for there to be gains from diversification?the correlation coefficient must be: >0 <1 <0 zero

<1

A loan for a new car costs the borrower .8% per month. The APR is _____ and the EAR is _______. 9.6% ; 10.03% 0.8% ; 0.84% 10.03% ; 9.6% 9.9%; e0.10

A

Arbitrage is based on the idea that ________. securities with similar risk should sell at different prices assets with identical risks must have the same expected rate of return the expected returns from equally risky assets are different markets are perfectly efficient

B

There are cost benefits to passive investing driving the current boom in ETFs. Assume you pay your mutual fund company 1% in fees per year over a period of 20 years. Your $100,000 initial investment in 20 years will be worth _____ at 7% compound annual return w/o any fees and _____ at 6% compound annual return if you account for the annual fee of 1%. $240,000; $220,000 $140,000; $120,000 $386,968; $320,000 not sure

C

CAPM Assumptions

1. investors are risk adverse 2. all investors have common time horizon 3. all investors have same expectations about future security returns 4. capital markets are perfect

Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is ________.

3.7%

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is ________. -.0020 .0447 -.0447 .0020

-.0020

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is -0.002, the correlation coefficient between the returns on A and B is ________. -0.40 -0.50 .60 -0.36

-.40

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year? -3.64% -6.36% -11.74% -6.44%

-6.44%

You have analyzed monthly return data of Apple stock. From the past data you are projecting an expected monthly return for Apple stock of 0.90%. The expected monthly standard deviation of return is 7.15% and the monthly risk-free rate 0.15%. When annualizing these metrics, what annual Sharpe ratio do you expect to achieve on an investment in Apple stock? 0.30 0.36 0.40 0.13

.36

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a 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 ________. 1.04 0.25 0.60 0.50

.50

If you have the historical returns on stock A, the returns on the Market Index and on the risk-free asset you can calulate the Beta of stock A. Assume the COV(A,Market)=773.31 and the Standard deviation of the market return is 27.81% then A's Beta is equal to: 1.456 27.81 1.156 1.0

1.0

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 % 12.24% 2.04% 12.89%

12.24%

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment? 13.17% 12.77% 6.38% 14.25%

13.17%

You have the following rates of return for a risky portfolio for several recent years: 2011: 35.23% 2012: 18.67% 2013: −9.87% 2014: 21.45% The annualized (geometric) average return on this investment is ________. 16.37% 15.60% 15.13% 75.66%

15.13%

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately ________. (Hint: Find optimalweights first.) 19% 18% 14% 16%

16%

A stock you bought for $100 exactly 3 years ago has not paid any dividends but is selling for $109 today. What is your geometric average annual return on this investment? 3% 4.769% 2.91% e0.09 - 1

2.91%

Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment? 16.71% 3.01% 12.42% 3.09%

3.09%

You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal ________. 3.12 1.8 2.48 5.49

3.12

If the nominal rate of return on investment is 5% and inflation is 1.8% over a 1 year period, what is the real rate of return on this investment? 3.14% 4.20% 3.92% 4.13%

3.14%

In class we pointed out that measuring the outperformance of an equity portfolio vis-a-vis a benchmark portfolio (like the S&P500) we can use the same methodology that we use to calculate real rates of interest from nominal rates when adjusted for the rate of inflation.Using this methodolgy, assume your portfolio had a price return of 6.5% and the benchmark portfolio returned 3% then what was the rate at which your portfolio outperformed the benchmark? 3.5% 3.6% 9.5% 3.4%

3.4%

On a loan you owe an APR of 7% to be paid once annually (i.e. which also is equal to the EAR since there is only one payment annually). The equivalent APR with continuous compounding is ________. 6.62% 6.77% ln(0.07) 7.25%

6.77%

The effective annual rate (ear) of your monthly-pay car loan is 7.2%. What is the APR on the loan? 7.47% 7.44% 9.89% 6.97%

6.97%

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a 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%. If an individual investor's level of risk aversion (A) is 0.15/0.04, i.e. the investor requires 3.75 units of excess return per unit of variance, then this investor's optimal percent invested in the risky asset is __________ 66.7% 75% 50% 0

66.7%

The buyer of a new home is quoted a mortgage rate of .6% per month. What is the APR on the loan? 7.2% .50% 7.44% 6%

7.2%

Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return? 8.8% 9.25% 7% 8.5%

8.8%

Rational but conservative investors with a high level of risk-aversion will usually prefer portfolios ________. located on the capital market line to those located on the efficient frontier (CML) at or near the minimum-variance point on the efficient frontier located on the efficient frontier to those located on the capital market line (CML) that are risk-free to all other asset choices

A

Two investment advisers are comparing performance. Adviser A averaged a 19% return with a portfolio beta of 1.5, and adviser B averaged a 15.50% 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 bc larger Alpha

Which of the following statements about tracking error is incorrect? It results from firm-specific risk The more diversified a portfolio, the lower it's tracking error It is the standard deviation of the active return of an active portfolio all the above are correct

All of the above are correct

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, ________. SDA Corp. stock is fairly priced SDA Corp. stock's alpha is -.75% SDA Corp. stock alpha is .75% SDA Corp. stock is underpriced

B

When re-assessing the risk of abc stock in relation to the market index, you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ________. correlation coefficient between abc and the market has fallen correlation coefficient between abc and the market has risen unsystematic risk of abc has risen covariance between abc and the market has fallen

B

The most appropriate measure for the riskiness of a diversified portfolio is ________. alpha standard deviation beta variance

Beta

In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? The capital market line always has a positive slope. The capital market line is also called the security market line. The capital market line is the best-attainable capital allocation line. The capital market line is the line from the risk-free rate through the market portfolio.

CML = SML

If all investors become less risk averse, the SML will ________ and stock prices will ________. shift downward; fall shift upward; rise have the same intercept with a steeper slope; fall have the same intercept with a flatter slope; rise

D

Suppose you are professional asset manager currently invested in a passive investment fund. You are somewhere along a CAL with a slope of 0.16 invested solely in the S&P500 and the risk free asset. Your analyst comes into your office to tell you that according to his analysis Google has a significant Alpha recommending an investment. You decide on adding a position in Google to the S&P500, resulting in a new risky portfolio consisting of the S&P500 + Google. However, you are aware of the importance of striking a balance between adding Alpha (a good thing) versus adding residual, diversifiable risk (a bad thing).Using the data below, calculate the optimal position in Google and the resulting Sharpe ratio (i.e. the new slope of the CAL you are now on). *To calculate the optimal weights please use formulas 6.16 and 6.17 from the book. *The IR will be simply Google's alpha / Google's residual SD. *to calculate the new SR use formula 6.18 where SR2new=SR2old + IR2(where IR=Information Ratio; SR=Sharpe Ratio) S&P500 Index Index risk premium: 2.5% Index SD: 4.31 Index Sharpe Ratio: 0.16 Google Alpha: 1.45 Google Beta: 1.65 Google Residual Variance: 132.48 Google Residual SD: 11.51 Given the above information, the optimal proportion of Google in the risky portfolio will be _____, the Information Ratio of Google is ______ and the new Sharpe Ratio is _______. 24.10%; 0.09; 0.19 19.30%; 0.165; 0.27 16.20%; 0.131; 0.24 8.59%; 0.126; 0.20

D

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________. greater than 0 equal to 0 equal to -1 equal to the sum of the securities' standard deviations

Equal to 0

In an efficient market, a portfolio with a Beta of 1.35 will have a lower expected return than a single stock with a Beta of 1.35 due to the power of diversification. True False

False

The Treynor measure is equal to the excess return divided by the variance of the market portfolio. True False

False

Which one of the following measures is a time-weighted return that allows for compounding? historical average return arithmetic average return IRR geometric average return

Geometric

If in the previous question the Residual SD for Google is much lower than 11.51% then, compared to the previous answer, we would expect Google's optimal weight to be _____ and the new Sharpe Ratio to be ______ . higher; higher lower; lower lower; higher higher; lower

Higher Higher

In portfolio theory, the ________ Sharpe ratio is found on the ________ capital market line. highest; steepest highest; flattest lowest; flattest lowest; steepest

Highest; Steepest

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 ________. geometric average return time-weighted return arithmetic average return IRR

IRR

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? market risk unique risk none of these options (With a correlation of 1, no risk will be reduced.) unsystematic risk

None

A security's excess return when plotted against the market's excess return is called the ________. capital market line (CML) capital allocation line (CAL) security characteristic line (SCL) efficient frontier

SCL

Assume stock xyz has a beta of 1.5 and a residual standard deviation of 30%. The standard deviation of the market-index portfolio is 20%.An investor who currently holds the market-index portfolio decides to reduce the portfolio allocation to the market index to 90% and to invest 10% in stock xyz. What would have a greater impact on the new portfolio's standard deviation: an increase of 0.15 in xyz's beta or an increase of 3 percentage points (from 30 to 33%) in xyz's residual standard deviation? both would have the same impact the increase in its beta can't be determined without knowing xyz's alpha the increase in its standard deviation

The increase in it's beta (answer kind of in notes) Beta's are additive?

A t-statistic of -0.97 for the estimate for Alpha of -0.604 indicates that the estimate itself in absolute terms (since it's negative) is lower than its standard error signalling low statistical significance and a relatively high probability that the Alpha estimate come about by pure chance.

True

All else the same, the higher the Alpha of a stock the higher its optimal proportion in an active portfolio True False

True

All else the same, the information ratio tells us that the higher the Residual Variance (i.e. the firm specific risk) of a stock the lower its optimal proportion in an active portfolio. True False

True

The Beta of a portfolio of stocks is equal to the weighted sum of the individual Betas. True False

True

The Information Ratio tells us, for an active manager (think hedge fund), how much risk the manager took to generate an outperformance return of alpha. True False

True

The Sharpe Ratio for the risky Market portfolio is the slope of the Capital Market line (CAL) True False

True

The mean-variance criterion states that when the return on portfolio A is higher than the return on portfolio B and the standard deviation of portfolio A is lower than that of portfolio B that we can say portfolio A dominates portfolio B and a rational investor would never want to invest in portfolio B. True False

True

When the correlation coefficient between the returns of two securities is zero, an investor can still receive benefits from diversifying from combining both securities and the standard deviation of a portfolio consisting of both securities would lower than the weighted sum of the individual securities' standard deviations. True False

True

While the individual investor always chooses his/her 'normal' position along the CAL in accordance with his/her level of risk aversion, the Sharpe Ratio of the Complete portfolio consisting of the risky and the risk-free asset in the 'normal' proportions is always going to be equal to the Sharpe Ratio of the risky portfolio alone. True False

True

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

[1 + (APR/n)]^n - 1