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FIN 7013
Activity
Northcentral University
FIN7013
FIN7013-chap5-8exam
There are 50 multiple choice questions on the exam. Each question is worth 2 points. For a total of 100 points.
Please highlight the correct answer for the multiple choice questions. GOOD LUCK!
Northcentral University
FIN7013
1. A year ago, you invested $1,000 in a savings account that pays an annual interest rate of 7%.
What is your approximate annual real rate of return if the rate of inflation was 3% over the year?
A. 4%.
B. 10%.
C. 7%.
D. 3%.
E. none of the above.
2. You purchased a share of stock for $20. One year later you received $1 as dividend and sold
the share for $29. What was your holding period return?
A. 45%
B. 50%
C. 5%
D. 40%
E. none of the above
Northcentral University
FIN7013
You have been given this probability distribution for the holding period return for KMP stock:
Northcentral University
FIN7013
6. What is the expected holding period return for KMP stock?
A. 10.40%
B. 9.32%
C. 11.63%
D. 11.54%
E. 10.88%
8. Toyota stock has the following probability distribution of expected prices one year from now:
If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per share, what is
your expected holding period return on Toyota?
A. 17.72%
B. 18.89%
C. 17.91%
D. 18.18%
E. None of the above
10. The historical arithmetic rate of return on small stocks over the 1926-2005 period has been
_______. The standard deviation of small stocks' returns has been ________ than the standard
deviation of large stocks' returns.
A. 12.43%, lower
B. 13.11%, lower
C. 16.24%, higher
D. 17.95%, higher
E. 21.53%, higher
FIN7013
11. A year ago, you invested $2,500 in a savings account that pays an annual interest rate of
2.5%. What is your approximate annual real rate of return if the rate of inflation was 3.4% over
the year?
A. 0.9%.
B. -0.9%.
C. 5.9%.
D. 3.4%.
E. none of the above.
12. If a portfolio had a return of 12%, the risk free asset return was 4%, and the standard
deviation of the portfolio's excess returns was 25%, the risk premium would be _____.
A. 8%
B. 16%
C. 37%
D. 21%
E. 29%
13. In the mean-standard deviation graph an indifference curve has a ________ slope.
A. negative
B. zero
C. positive
D. northeast
E. cannot be determined
Northcentral University
FIN7013
14. To maximize her expected utility, she would choose the asset with an expected rate of return
of _______ and a standard deviation of ________, respectively.
A. 12%; 20%
B. 10%; 15%
C. 10%; 10%
D. 8%; 10%
E. none of the above
15. According to the mean-variance criterion, which one of the following investments dominates
all others?
A. E(r) = 0.15; Variance = 0.20
B. E(r) = 0.10; Variance = 0.20
C. E(r) = 0.10; Variance = 0.25
D. E(r) = 0.15; Variance = 0.25
E. none of these is dominates the other alternatives.
17. According to the mean-variance criterion, which of the statements below is correct?
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FIN7013
18. Steve is more risk-averse than Edie. On a graph that shows Steve and Edie's indifference
curves, which of the following is true? Assume that the graph shows expected return on the
vertical axis and standard deviation on the horizontal axis.
I) Steve and Edie's indifference curves might intersect.
II) Steve's indifference curves will have flatter slopes than Edie's.
III) Steve's indifference curves will have steeper slopes than Edie's.
IV) Steve and Edie's indifference curves will not intersect.
V) Steve's indifference curves will be downward sloping and Edie's will be upward sloping.
A. I and V
B. I and III
C. III and IV
D. I and II
E. II and IV
20. An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of
0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent. His portfolio's
expected return and standard deviation are __________ and __________, respectively.
A. 0.114; 0.12
B. 0.087;0.06
C. 0.295; 0.12
D. 0.087; 0.12
E. none of the above
21. What percentages of your money must be invested in the risky asset and the risk-free asset,
respectively, to form a portfolio with an expected return of 0.09?
A. 85% and 15%
B. 75% and 25%
C. 67% and 33%
D. 57% and 43%
E. cannot be determined
Northcentral University
FIN7013
22. Treasury bills are commonly viewed as risk-free assets because
A. their short-term nature makes their values insensitive to interest rate fluctuations.
B. the inflation uncertainty over their time to maturity is negligible.
C. their term to maturity is identical to most investors' desired holding periods.
D. Both A and B are true.
E. Both B and C are true.
Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P)
and T-Bills. The information below refers to these assets.
Northcentral University
FIN7013
23. What is the expected return on Bo's complete portfolio?
A. 10.32%
B. 5.28%
C. 9.62%
D. 8.44%
E. 7.58%
28. 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
A. greater than zero.
B. equal to zero.
C. equal to the sum of the securities' standard deviations.
D. equal to -1.
E. none of the above.
Northcentral University
FIN7013
29. Which of the following statements is (are) true regarding the variance of a portfolio of two
risky securities?
A. The higher the coefficient of correlation between securities, the greater the reduction in the
portfolio variance.
B. There is a linear relationship between the securities' coefficient of correlation and the portfolio
variance.
C. The degree to which the portfolio variance is reduced depends on the degree of correlation
between securities.
D. A and B.
E. A and C.
Northcentral University
FIN7013
31. The expected rates of return of stocks A and B are _____ and _____ , respectively.
A. 13.2%; 9%
B. 14%; 10%
C. 13.2%; 7.7%
D. 7.7%; 13.2%
E. none of the above
32. The standard deviations of stocks A and B are _____ and _____, respectively.
A. 1.5%; 1.9%
B. 2.5%; 1.1%
C. 3.2%; 2.0%
D. 1.5%; 1.1%
E. none of the above
36. Security X has expected return of 12% and standard deviation of 20%. Security Y has
expected return of 15% and standard deviation of 27%. If the two securities have a correlation
coefficient of 0.7, what is their covariance?
A. 0.038
B. 0.070
C. 0.018
D. 0.013
E. 0.054
Northcentral University
FIN7013
37. As diversification increases, the total variance of a portfolio approaches ____________.
A. 0
B. 1
C. the variance of the market portfolio
D. infinity
E. none of the above
39. A single-index model uses __________ as a proxy for the systematic risk factor.
A. a market index, such as the S&P 500
B. the current account deficit
C. the growth rate in GNP
D. the unemployment rate
E. none of the above
40. Analysts may use regression analysis to estimate the index model for a stock. When doing
so, the slope of the regression line is an estimate of ______________.
A. the α of the asset
B. the β of the asset
C. the σ of the asset
D. the δ of the asset
E. none of the above
41. In a factor model, the return on a stock in a particular period will be related to _________.
A. firm-specific events
B. macroeconomic events
C. the error term
D. both A and B
E. neither A nor B
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FIN7013
42. Suppose the following equation best describes the evolution of β over time:
β t = 0.31 + 0.82β t-1
If a stock had a β of 0.88 last year, you would forecast the β to be _______ in the coming year.
A. 0.88
B. 0.82
C. 0.31
D. 1.03
E. none of the above
43. The index model for stock A has been estimated with the following result:
RA = 0.01 + 0.9RM + eA
If σ M = 0.25 and R2A = 0.25, the standard deviation of return of stock A is _________.
A. 0.2025
B. 0.2500
C. 0.4500
D. 0.8100
E. none of the above
45. The expected impact of unanticipated macroeconomic events on a security's return during
the period is
A. included in the security's expected return.
B. zero.
C. equal to the risk free rate.
D. proportional to the firm's beta.
E. infinite.
46. In the single-index model represented by the equation ri = E(ri) + β iF + ei, the term ei
represents
A. the impact of unanticipated macroeconomic events on security i's return.
B. the impact of unanticipated firm-specific events on security i's return.
C. the impact of anticipated macroeconomic events on security i's return.
D. the impact of anticipated firm-specific events on security i's return.
E. the impact of changes in the market on security i's return.
Northcentral University
FIN7013
47. The idea that there is a limit to the reduction of portfolio risk due to diversification is
A. contradicted by both the CAPM and the single-index model.
B. contradicted by the CAPM.
C. contradicted by the single-index model.
D. supported in theory, but not supported empirically.
E. supported both in theory and by empirical evidence.
48. Consider the single-index model. The alpha of a stock is 0%. The return on the market index
is 10%. The risk-free rate of return is 3%. The stock earns a return that exceeds the risk-free rate
by 11% and there are no firm-specific events affecting the stock performance. The β of the stock
is _______.
A. 0.64
B. 0.75
C. 1.17
D. 1.33
E. 1.50
49. Suppose you held a well-diversified portfolio with a very large number of securities, and that
the single index model holds. If the σ of your portfolio was 0.25 and σ M was 0.21, the β of the
portfolio would be approximately ________.
A. 0.64
B. 1.19
C. 1.25
D. 1.56
E. none of the above
50. The index model for stock A has been estimated with the following result:
RA = 0.01 + 0.94RM + eA
If σ M = 0.30 and R2A = 0.28, the standard deviation of return of stock A is _________.
A. 0.2025
B. 0.2500
C. 0.4500
D. 0.5329
E. none of the above
Northcentral University
FIN7013