FINANCE 3050 EXAM 2

The 600 shares of Alibaba stock in your portfolio have a portfolio cap of $99,600. What is the current price per share of Alibaba stock? A) $166.00 B) $99.00 C) $83.00 D) $157.00 E) Cannot be determined without additional information.

A) $166.00

Forecasted returns over the next four years for Stocks A and B are shown below. (2.5) What is the correlation between the 2 stocks? A) -0.9886 B) 0.0000 C) -0.2537 D) 0.9886 E) 0.2591

A) -0.9886

What is the Sharpe Ratio of asset B (2.3)? A) 0.1750 B) 1.1750 C) 0.0400 D) 0.4000 E) 0.1100

A) 0.1750

What is the Sharpe Ratio of asset Y? (2.9)

A) 0.2759

A portfolio has an expected return of 12.4% and a standard deviation of 15.8%. The risk-free rate is 2.6%. What is the Sharpe Ratio? A) 0.62 B) 0.71 C) 0.52 D) 0.75 E) 0.49

A) 0.62

Your portfolio has an expected return of 14.2% and a standard deviation of 15.3%. The U.S. Treasury Bill rate is 3.48%. What is the Sharpe Ratio of your portfolio? A) 0.70 B) 0.83 C) 0.77 D) 0.67 E) 0.65

A) 0.70

It the expected return on the market portfolio is 12%, the risk-free rate is expected to be 4%, and the expected volatility of the market portfolio is 10%, then the Sharpe Ratio for the market portfolio is closest to: A) 0.80 B) 0.40 C) 0.56 D) 0.12 E) 0.48

A) 0.80

The Correlation between Stock Y's and Stock Z's returns is closest to (SEE 2.6): A) 0.92 B) -0.24 C) 0.24 D) 0.12 E) -0.92

A) 0.92

Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $89,100. Stock X is worth $57,800. What is the portfolio weight of stock Y? A) 35.13% B) 39.60% C) 52.34% D) 64.87% E) 61.09%

A) 35.13%

What is the weight on asset A (2.3)? A) 88.89% B) 75.00% C) 5.00% D) 50.51% E) 0.45%

A) 88.89%

Which of the following statements is false? A) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. C) With a positive amount invest in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be. D) Diversification reflects the magic of correlation. E) Stock returns will tend to move together if they are affected similarly by economic events.

A) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together.

Research on semi-strong form efficient markets indicates which one of the following is correct? A) Buying and holding a broad market index is one of the best investment strategies. B) Predicting future stock prices is relatively easy for academic researchers. C) Future returns on large company stocks tend to closely follow past pricing patterns. D) Identifying a stock with repetitive price movements is generally the best method of active investing. E) Trading costs have little, if any, impact on investment returns.

A) Buying and holding a broad market index is one of the best investment strategies.

Dennison Lumber announced last week that its unpopular CEO had resigned. In response to this announcement, the firm's stock price increased from $17 a share to $23 a share. The following day the price declined to $21 a share and has remained constant at that level. This is an example of: A) an over-reaction and correction. B) an efficient market reaction. C) an underpricing. D) a pre-activity action. E) a delayed reaction.

A) an over-reaction and correction.

To reduce your risk, you should select stocks whose returns exhibit a ________ positive correlation rather than a ________ positive correlation. A) low; high B) high; low C) low; low D) high; high E) none of the above.

A) low; high

Diversification is investing in a variety of assets with which one of the following as the primary goal? A) reducing some risks B) minimizing taxes C) increasing returns D) eliminating all risks E) increasing the variance

A) reducing some risks

Most investors are risk-averse, which means they: A) require an increase in return for any increase in risk. B) invest only in government insured securities. C) do not demand a risk-premium. D) refuse to accept any financial risk. E) gain satisfaction from the excitement of risk.

A) require an increase in return for any increase in risk.

According to the concept of loss aversion, individual investors are most apt to do which one of the following? A) sell stocks with gains more frequently than stocks with losses B) sell all stocks after a pre-determined length of time C) hold stocks with gains and sell stocks with losses D) sell stocks with losses more frequently than stocks with gains E) hold all stocks unless they decline more than ten percent in value

A) sell stocks with gains more frequently than stocks with losses

Amy uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices. Secondly, she analyzes the financial statements of The Atwater Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Amy earns excess profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least ________ efficient but less than ________ efficient. A) weak-form; semi-strong form B) semi-strong form; strong form C) semi-strong form; full form D) weak form; mild form E) mild form; semi-strong form

A) weak-form; semi-strong form

Which one of the following correlation coefficients can provide the greatest diversification benefit? A) 0.8 B) -0.6 C) 0.5 D) 0.0 E) -0.5

B) -0.6

What is the expected return of the portfolio? (2.8)

B) 0.0389

What is the Sharpe Ratio of asset B? (2.8)

B) 0.1750

Given the information in the table, find the Sharpe Ratio for the Value Stocks portfolio. (2.4) The risk-free rate is 3.5%. A) 1.200 B) 0.607 C) 0.793 D) 0.536 E) 0.584

B) 0.607

What is the weight on asset Y? (2.9)

B) 0.9382

What is the weight on asset B (2.3)? A) 0.45% B) 11.11% C) 5.00% D) 75.00% E) 50.51%

B) 11.11%

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. The weight on Ball Corporation in your portfolio is: A) 30% B) 20% C) 36% D) 40% E) 50%

B) 20%

Tall Stand Timber stock has an expected return of 16.8%. What is the risk-free rate if the risk premium on the stock is 12.1%? A) 5.67% B) 4.70% C) 5.30% D) 7.17% E) 6.55%

B) 4.70%

Travis has a portfolio consisting of two stocks, A and B, which is valued at $53,800. Stock A is worth $23,900. What is the portfolio weight of stock B? A) 52.80% B) 55.58% C) 44.42% D) 54.35% E) 45.15%

B) 55.58%

Which one of the following will automatically occur if all investors are rational? A) All investors will earn the same rate of return. B) Equivalent risk assets will have equal expected rates of return. C) All investors will earn the market rate of return. D) The riskier an asset, the higher its market price will be. E) All stock prices will be equal.

B) Equivalent risk assets will have equal expected rates of return.

Which of the following will lead to excess profits in a semi-strong form efficient market? I. private financial information II. historical price trends III. financial analysts reports IV. unreleased merger plans A) I only B) I and IV only C) II and III only D) I, II, and III only E) I, III, and IV only

B) I and IV only

Which one of the following defines frame dependence? A) Investors tend to be more irrational in bear markets than in bull markets. B) Investors react differently depending on how an opportunity is presented. C) Investors suffer from money illusion in bull markets but not in bear markets. D) Investors react differently to prospective gains and losses. E) Investors tend to make more cognitive errors when they view investing as gambling.

B) Investors react differently depending on how an opportunity is presented.

You own 3 securities. Security A has an expected return of 11% as compared to 14% for Security B and 9% for Security C. The risk-free rate is 5%. Which one of the following statements is correct? A) The risk premium on Security A exceeds that of Security B B) Security B has a risk premium that is 50% greater than Security A's risk premium C) The risk premium on Security C is 5% D) There is no risk premium on Security C E) All three securities have the same expected risk premium

B) Security B has a risk premium that is 50% greater than Security A's risk premium

If the risk-free rate is 3%, which stock is clearly least desirable(2.7)? A) W B) X C) Y D) Z E) Cannot be determined from the given information

B) X

Last week, New Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of: A) a pre-activity action. B) an efficient market reaction. C) an over-reaction and correction. D) a delayed reaction. E) a post-activity reaction

B) an efficient market reaction.

Which one of the following returns is the average return you expect to earn in the future on a risky asset? A) realized return B) expected return C) market return D) real return E) adjusted return

B) expected return

The returns on Asset A are strongly, positively correlated with Asset B's returns; thus, holding the two assets together will: A) significantly reduce portfolio risk. B) have little or no effect on portfolio risk. C) significantly increase portfolio return. D) significantly increase portfolio risk. E) none of the above.

B) have little or no effect on portfolio risk.

Technical analysis is the study of which one of the following as the basis for trading? A) financial statements B) historical prices C) investor's required return D) systematic risk E) dividend growth

B) historical prices

Which one of the following distinguishes a minimum variance portfolio? A) lowest risk portfolio possible given any specified expected rate of return B) lowest risk portfolio of any possible portfolio given the same securities but in differing proportions C) any portfolio with an expected standard deviation of 9% or less D) the zero risk portfolio created by maximizing the asset allocation mix E) any portfolio created with securities that are evenly weighted in respect to the asset allocation mix

B) lowest risk portfolio of any possible portfolio given the same securities but in differing proportions

Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern? A) overreaction and correction B) random walk C) efficient movement D) deviated pattern E) dispersed flow

B) random walk

What is the extra compensation paid to an investor who invests in a risky asset rather than in a riskfree asset called? A) correlated value B) risk premium C) realized return D) expected return E) efficient return

B) risk premium

What is the Sharpe Ratio of the portfolio? (2.8)

C) -0.0086

What is the Sharpe Ratio of asset A (2.3)? A) -0.0000 B) 0.1525 C) -0.1000 D) -0.0525 E) 0.1000

C) -0.1000

What is the Sharpe Ratio of asset X? (2.9)

C) 0.2083

What is the standard deviation of the portfolio? (2.9)

C) 0.2662

What is the Sharpe Ratio of the portfolio? (2.9)

C) 0.2934

What is the weight on asset A? (2.8)

C) 0.8889

Which one of the following values would be the most preferable as a Sharpe ratio? A) −1.11 B) 0.10 C) 1.02 D) −0.89 E) 0.00

C) 1.02

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock. You expect a return of 16% for Merck and 12% for Home Depot. What is the expected return on your portfolio?

C) 13.50%

You invested $200,000 in a stock that is returning 14%, $300,000 invested in a stock that is returning 18%, and $400,000 invested in a stock that is returning 15%. What is the expected return of your portfolio?

C) 15.78%

A portfolio has a Sharpe Ratio of 0.75, a standard deviation of 17.0%, and an expected return of 15.9%. What is the risk-free rate? A) 1.98% B) 2.48% C) 3.15% D) 2.36% E) 3.09%

C) 3.15%

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. The weight on Lowes in your portfolio is: A) 20% B) 60% C) 30% D) 50% E) 40%

C) 30%

What is the expected risk premium for the S&P 500? (SEE 2.1) A) 5.7% B) 7.0% C) 8.4% D) 4.8% E) 0.0%

C) 8.4%

Which of the following statements is false? A) We say a portfolio is short those stocks that have negative portfolio weights. B) To arrive at the best possible set of risk and return opportunities, we should keep adding stocks until all investment opportunities are represented. C) Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier. D) The capital allocation line with the largest slope represents the highest available Sharpe Ratio in the economy. E) Adding new investment opportunities allows for greater diversification and improves the efficient frontier

C) Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier.

Which one of the following best describes the current understanding of market efficiency? A) The market tends to overreact to new information in a manner which can be used to earn abnormal returns. B) Markets tend to react slowly to unanticipated announcements. C) Short-term market movements are difficult, if not impossible, to predict accurately. D) The market appears to be highly inefficient. E) Markets under-react to unanticipated events in a manner which can be used to earn excess returns.

C) Short-term market movements are difficult, if not impossible, to predict accurately.

When you compile a portfolio of stocks, you should avoid including stocks that exhibit: A) no correlation. B) an inverse correlation. C) a positive correlation. D) a negative correlation. E) none of the above

C) a positive correlation.

According to the theory of recency bias, investors tend to believe the financial markets will: A) react over the next year in direct opposition to the performance of the prior year. B) gravitate to their long-term average rates of return. C) continue to perform as they have over the past couple of years. D) tend to reverse direction at least every five years. E) have a maximum of three years of positive annual returns before declining somewhat

C) continue to perform as they have over the past couple of years.

Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets? A) efficient portfolio B) allocated set C) investment opportunity set (Markowitz Bullet) D) financial frontier E) minimum variance set

C) investment opportunity set (Markowitz Bullet)

Which one of the following is required for a trader to earn excess profits? A) excessive research B) relatively stable market state C) market inefficiency D) excessive trading E) highly volatile market state

C) market inefficiency

If two assets have a zero correlation, their returns will: A) always move in opposite directions by the same amount B) always move in the same direction by the same amount C) move randomly and independently of each other D) always move in the same direction but not necessarily by the same amount E) always move in opposite directions but not necessarily by the same amount

C) move randomly and independently of each other

Which one of the following best describes the type(s) of information included in a strong-form efficient market? A) historical B) historical and private C) private and public D) current and public E) historical and public

C) private and public

A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? A) the lowest return for any given level of risk B) the largest number of potential portfolios that can achieve a specific rate of return C) the lowest risk for any given rate of return D) a positive rate of return and a zero standard deviation E) the largest number of potential portfolios that can achieve a specific level of risk

C) the lowest risk for any given rate of return

Loss aversion is defined as: A) selling any security for less than the price paid to acquire it. B) the inability to mentally acknowledge a loss on a security. C) the reluctance to sell a security after it has decreased in value. D) selling a security as soon as it has increased significantly in value. E) the tendency to quickly sell any investment that has decreased in value.

C) the reluctance to sell a security after it has decreased in value.

The value of an individual security divided by the total value of the portfolio is referred to as the portfolio: A) balance. B) standard deviation. C) weight. D) beta. E) variance

C) weight.

If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to: A) the risk-free rate plus one-half the market rate. B) the market rate. C) zero. D) the risk-free rate. E) the market rate minus the risk-free rate

C) zero.

Which value of correlation indicates a stronger association than 0.4? A) -0.4 B) 0.0 C) −0.8 D) 0.4 E) −0.3

C) −0.8

What is the Sharpe Ratio of asset A? (2.8)

D) -0.1000

What is the weight on asset X? (2.9)

D) 0.0618

What is the weight on asset B? (2.8)

D) 0.1111

What is the expected return of the portfolio? (2.9)

D) 0.1281

What is the standard deviation of the portfolio? (2.8)

D) 0.1285

The required return on Stock X is 14% and the risk-free rate of return is 4% How much are investors requiring as compensation for risk? A) 8% B) 12% C) 14% D) 10% E) 20%

D) 10%

What is the expected return of a portfolio that consists of $165,000 invested in a stock that is returning 11.50%, $85,000 invested in a stock that is returning 22.75%, and $235,000 invested in a stock that is returning 10.25%?

D) 12.87%

Which one of the following is the basis for prospect theory? A) Some investors are irrational. B) Investors react differently depending on the day of the week. C) Investors suffer from money illusion. D) Investors react differently to prospective gains and losses. E) Investors make cognitive errors.

D) Investors react differently to prospective gains and losses.

If the market is semi-strong form efficient, then which one of the following statements is true? A) Technical analysts have the ability to earn excess profits but fundamental analysts cannot. B) Both technical and fundamental analysts earn excess profits based on their research. C) Fundamental analysts can earn excess profits but technical analysts cannot. D) Neither technical nor fundamental analysis leads to excess profits. E) No answer can be determined as the form of market efficiency is unrelated to abnormal, or excess returns

D) Neither technical nor fundamental analysis leads to excess profits.

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return? A) Purchase stocks that have exceptionally high standard deviations. B) Increase the amount of money invested in the portfolio. C) This happens automatically. D) Purchase a variety of securities; i.e., diversify. E) Wait until the stock market rises

D) Purchase a variety of securities; i.e., diversify.

Real assets would not include: A) collectibles B) personal residences C) automobiles D) U.S. currency E) gold

D) U.S. currency

Which of the following statements is false? A) When the covariance equals 0, the returns are uncorrelated. B) To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together. C) Independent risks are uncorrelated. D) While the sign of the correlation is easy to interpret, its magnitude is not. E) Investors demand a premium for assuming risk.

D) While the sign of the correlation is easy to interpret, its magnitude is not.

Investors are motivated to purchase an asset because of its: A) emotional benefits. B) past returns. C) sentimental value. D) expected returns. E) all of the above.

D) expected returns.

Tricia has lost money on a particular stock for the past three years. Thus, she believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the: A) false consensus. B) law of small numbers. C) house money effect. D) gambler's fallacy. E) recency bias.

D) gambler's fallacy.

If you believe that stock market prices follow a random walk, then: A) there is no financial benefit from investing in the stock market. B) you also believe the market is strong-form efficient. C) studying past price movements will lead to excess profits. D) historical price information provides no benefit in predicting future prices. E) having inside information will not lead to excess profits.

D) historical price information provides no benefit in predicting future prices.

Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released? A) private, non-material information B) material public information C) public information D) material non-public information E) abnormal information

D) material non-public information

Where does the minimum variance portfolio lie in respect to the investment opportunity set? A) highest point B) most rightward point C) exact center D) most leftward point E) lowest point

D) most leftward point

Which one of the following is a trader whose trades are not based on meaningful financial analysis or information? A) sentiment trader B) specialist C) market maker D) noise trader E) arbitrageur

D) noise trader

An efficient portfolio is a portfolio that does which one of the following? A) offers the highest return for the lowest possible cost B) lies on the vertical axis when graphing expected returns against standard deviation C) eliminates all risk while providing an expected positive rate of return D) offers the highest return for a given level of risk E) provides an evenly weighted portfolio of diverse assets

D) offers the highest return for a given level of risk

A collection of assets held by an investor is called which one of the following? A) bundle B) grouping C) weights D) portfolio E) basket

D) portfolio

The primary benefit of diversification is that it: A) is cheaper. B) is free of risk. C) increases stock volatility. D) reduces the exposure of your investments to adverse effects of any individual investment. E) is convenient.

D) reduces the exposure of your investments to adverse effects of any individual investment.

Which one of the following is a characteristic of the self-attribution bias? A) believing that your recent performance is an indication of your future performance B) believing what you wish to believe C) believing that other investors agree with your thinking D) taking credit for the wins and blaming the losses on bad luck E) placing too much weight on information which you can gather easily

D) taking credit for the wins and blaming the losses on bad luck

What is the expected risk premium for Treasury Bills? (SEE 2.1) A) -2.7% B) -8.4% C) 4.8% D) -1.4% E) 0.0%

E) 0.0%

The Correlation between Stock X's and Stock Y's returns is closest to (SEE 2.6): A) 0.10 B) -0.69 C) 0.29 D) 0.58 E) 0.69

E) 0.69

The Correlation between Stock X's and Stock Z's returns is closest to (SEE 2.6): A) 0.62 B) 0.33 C) 0.60 D) 0.05 E) 0.71

E) 0.71

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. The weight on Abbott Labs in your portfolio is: A) 40% B) 11% C) 30% D) 20% E) 50%

E) 50%

You combine a set of assets using different weights such that you produce the following results (2.2). Which one of these portfolios CANNOT be a Markowitz efficient portfolio? A) A B) B C) C D) D E) E

E) E

Which of the following will increase the expected risk premium for a security, all else constant? I. an increase in the security's expected return II. a decrease in the security's expected return III. an increase in the risk-free rate IV. a decrease in the risk-free rate A) I only B) II and III only C) III only D) IV only E) I and IV only

E) I and IV only

Which of the following are ineffective strategies for producing excess returns if the market is semistrong form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements A) I and III only B) I and IV only C) I, II, and III only D) II, III, and IV only E) I, II, III, and IV

E) I, II, III, and IV

Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation? A) correlated market frontier B) diversified portfolio line C) minimum variance portfolio D) asset allocation relationship E) Markowitz efficient frontier

E) Markowitz efficient frontier

Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly. A) Maria is the chief financial officer and knows the firm intends to maintain its current dividend policy. B) Barb knows that Sue, an accounting clerk, is planning on resigning on Friday. C) Linda knows a new receptionist has just been hired. D) Wendy knows that her firm's net income is continuing to increase at a steady rate. E) Tracey knows her employer just received patent approval on a key new product.

E) Tracey knows her employer just received patent approval on a key new product.

Which alternative is an example of a financial asset? A) A mutual fund share B) A preferred stock C) A common stock D) A bond E) all of the above

E) all of the above

What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions? A) individual B) personal C) logical D) rational E) behavioral

E) behavioral

Which one of the following states that investors cannot consistently earn positive excess returns? A) current market hypothesis B) market return hypothesis C) risk-return theory D) excess theory E) efficient markets hypothesis

E) efficient markets hypothesis

Correlation is the: A) spreading of an investment across a number of assets B) daily return on an asset compared to its previous daily return C) measurement of the systematic risk contained in an asset D) squared measure of a security's total risk E) extent to which the returns on two assets move together

E) extent to which the returns on two assets move together

In an efficient market, stocks with similar risks will: A) yield the market rate of return. B) pay similar dividends. C) produce abnormal returns. D) have the same market price. E) have similar rates of return.

E) have similar rates of return.

You want to create the best portfolio that can be derived from two assets. Which one of the following will help you identify that portfolio? A) highest possible rate of return B) Treynor-minimal portfolio C) market equivalent level of risk D) highest portfolio beta E) highest Sharpe Ratio

E) highest Sharpe Ratio

One advantage of a real asset over a financial one is that: A) you receive a title providing evidence of ownership B) it represents a claim to a financial asset C) its price is guaranteed to increase over time D) real assets are more liquid than financial assets E) it can be enjoyed or used while it is owned

E) it can be enjoyed or used while it is owned

The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms? A) noise trading bounds B) market bounds C) sentiment borders D) implementation limits E) limits to arbitrage

E) limits to arbitrage

Which one of the following correlation relationships has the potential to completely eliminate risk? A) uncorrelated B) negative C) perfectly positive D) positive E) perfectly negative

E) perfectly negative

According to the concept of house money, individual investors are most apt to do which one of the following? A) take more risks with their initial investment than with the gains on that investment B) place high value on paper profits but low value on paper losses C) apply the same level of risk-aversion to all investments D) treat paper profits the same as initial cash investments E) value money differently depending upon its source

E) value money differently depending upon its source

What is the range of values for correlation? A) 0.0 to +1.0, inclusive B) 0.0 to infinity C) −1.0 to 0.0, inclusive D) Unlimited range E) −1.0 to +1.0, inclusive

E) −1.0 to +1.0, inclusive