Investment Management Exam Paper

Sample (Easy/Medium level of difficulty) Midterm Exam, FINE441- F all(prenominal) 2012 Answer KEYs are attached in the end THIS IS THE EXAMPLE OF MULTIPLE CHOICE QUESTIONS. THE NUMERICAL PROBLEMS WILL BE SIMILAR (NOT IDENTICAL) TO THE END OF CHAPTER PROBLEMS POSTED ON My Courses and Assignments 1. You purchased a share of nervous strain for $20. wholeness year later you received $1 as dividend and sold the share for $29. What was your holding period beget? A) 45% B) 50% C) 5% D) 40% E) no(prenominal) of the to a higher place Use the following to answer questions 2-3 You tolerate been given this probability distribution for the holding period fruit for XYZ tenorState of the Economy thunder Normal growth Recession 2. Probability . 30 . 50 . 20 HPR 18% 12% 5% What is the expected holding period return for XYZ stock? 3. What is the expected pattern deviation for XYZ stock? 4. A T-bill pays 6 percent pay back out of return. Would risk-averse investors invest in a idle portf olio that pays 12 percent with a probability of 40 percent or 2 percent with a probability of 60 percent? A) Yes, beca uptake they are rewarded with a risk premium. B) No, because they are non rewarded with a risk premium. C) No, because the risk premium is small. D) Cannot be determined.E) None of the above 5. In the mean- touchstone deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor? A) It is the venue of portfolios that have the same expected appreciates of return and different standard deviations. B) It is the locus of portfolios that have the same standard deviations and different rates of return. C) It is the locus of portfolios that offer the same utility according to returns and standard deviations. D) It connects portfolios that offer increasing utilities according to returns and standard deviations.E) no(prenominal) of the above. 6. Assume an investor with the following utility function U = E(r) 3/ 2(s2). To maximize her expected utility, she would choose the summation 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 Consider a risky portfolio, A, with an expected rate of return of 0. 15 and a standard deviation of 0. 15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve? A) E(r) = 0. 15 timeworn deviation = 0. 20 B) E(r) = 0. 5 Standard deviation = 0. 10 C) E(r) = 0. 10 Standard deviation = 0. 10 D) E(r) = 0. 20 Standard deviation = 0. 15 E) E(r) = 0. 10 Standard deviation = 0. 20 An investor can choose to invest in T-bills paying 5% or a risky portfolio with end-of-year cash flow of $132,000. If the investor requires a risk premium of 5%, what would she be willing to pay for the risky portfolio? A) $100,000 B) $108,000 C) $120,000 D) $145,000 E) $147,000 7. 8. 9. You invest $100 in a risky asset with an expected rate of return of 0. 12 and a standard deviation of 0. 15 and a T-bill with a rate of return of 0. 05.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 10. Beta is the measure of A) firm specific risk. B) diversifiable risk. C) market risk. D) unique risk. E) none of the above. 11. The efficient frontier of risky assets is A) the portion of the investment opportunity set that lies above the global minimum variance portfolio. B) the portion of the investment opportunity set that represents the highest standard deviations.C) the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation. D) the set of portfolios that have zero standard deviation. E) both A and B are true. 12. Consider two perfectly negatively correlated risky sec urities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. 12. 1. The weights of A and B in the global minimum variance portfolio are _____ and _____, respectively. A) 0. 24 0. 76 B) 0. 50 0. 50 C) 0. 57 0. 43 D) 0. 43 0. 57 E) 0. 76 0. 24 12. 2.The risk-free portfolio that can be formed with the two securities will earn _____ rate of return. A) 8. 5% B) 9. 0% C) 8. 9% D) 9. 9% E) none of the above 13. Portfolio theory as described by Markowitz is most concerned with A) the elimination of systematic risk. B) the effect of diversification on portfolio risk. C) the identification of unsystematic risk. D) active portfolio management to enhance returns. E) none of the above. 14. According to the great Asset Pricing Model (CAPM) a well diversified portfolios rate of return is a function of A) market risk B) unsystematic risk C) unique risk. D) reinvestment risk.E) none of the above. 15 . The risk-free rate and the expected market rate of return are 0. 06 and 0. 12, respectively. According to the capital asset pricing flummox (CAPM), the expected rate of return on security X with a beta of 1. 2 is equal to A) 0. 06. B) 0. 144. C) 0. 12. D) 0. 132 E) 0. 18 16. Which statement is not true regarding the market portfolio? A) It includes all publicly traded financial assets. B) It lies on the efficient frontier. C) All securities in the market portfolio are held in proportion to their market values. D) It is the tangency point between the capital market line and the indifference curve.E) All of the above are true. 17. Your personal creed is that security X has an expected rate of return of 0. 11. It has a beta of 1. 5. The risk-free rate is 0. 05 and the market expected rate of return is 0. 09. According to the Capital Asset Pricing Model, this security is A) underpriced. B) overpriced. C) fairly priced. D) cannot be determined from data provided. E) none of the above . 18. According to the index model, covariances among security pairs are A) due to the influence of a single common factor represented by the market index return. B) extremely difficult to calculate. C) related to industry-specific events.D) usually positive. E) A and D 19. In the single-index model represented by the equation ri = E(ri) + ? iF + ei, the term ei represents A) the impact of un pass judgment macroeconomic events on security is return. B) the impact of unanticipated firm-specific events on security is return. C) the impact of anticipated macroeconomic events on security is return. D) the impact of anticipated firm-specific events on security is return. E) the impact of changes in the market on security is return. 20. Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a higher beta than portfolio B.According to the Sharpe measure, the performance of portfolio A __________. A) is better than the performance of portfolio B B) is the same as the performance of portfolio B C) is poorer than the performance of portfolio B D) cannot be measured as there is no data on the alpha of the portfolio E) none of the above is true. 21. An trade opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. A) positive B) negative C) zero D) all of the above E) none of the above 22. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1. 1. The variance of returns on the well-diversified portfolio is nigh __________. A) 3. 6% B) 6. 0% C) 7. 3% D) 10. 1% E) none of the above 23. Consider the single factor APT. Portfolio A has a beta of 0. 2 and an expected return of 13%. Portfolio B has a beta of 0. 4 and an expected return of 15%. The riskfree rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in por tfolio _________ and a long position in portfolio _________. A) A, A B) A, B C) B, A D) B, B E) none of the above 4. You sold short 300 shares of common stock at $55 per share. The initial allowance is 60%. At what stock price would you receive a margin call if the maintenance margin is 35%? A. $51. 00 B. $65. 18 C. $35. 22 D. $40. 36 E. none of the above 25. You purchased 1000 shares of CSCO common stock on margin at $19 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend ignore interest on margin A. $12. 86 B. $15. 75 C. $19. 67 D. $13. 57 U = E(r) (A/2)s2, where A = 4. . 26. Based on the utility function above, which investment would you select? A. 1 B. 2 C. 3 D. 4 E. cannot tell from the information given 27. 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 ? of the asset B. the ? of the asset C. the ? of the asset D. the ? of the asset E. the ? of the asset 28. Analysts may use regression analysis to estimate the index model for a stock. When doing so, the intercept of the regression line is an estimate of ______________.A. the ? of the asset B. the ? of the asset C. the ? of the asset D. the ? of the asset E. the ? of the asset 29. The index model for stock A has been estimated with the following result RA= 0. 01 + 0. 9RM+ eA If ? 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. 0. 5460 Answer keys for the Sample Midterm, Fall 2012, FINE441. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 1 12. 2 13. B 14. A 15. D 16. D 17. C 18. E 19. B 20. B 21. C 22. C 23. C 24. B 25. D 26. C 27. B 28. A 29. C B C E B C C C C D C A D C