Download Sample Questions - Test #1 - Finance 450

Sample Questions - Test #1 - Finance 450 - Fall 2003
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
____
1. In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time every
thing else remaining constant the portfolio's risk would
a. Decrease.
b. Remain constant.
c. Increase.
d. Fluctuate positively and negatively.
e. Be a negative value.
Exhibit 7-1
Asset (A)
E(RA) = 12%
(sA) = 5%
WA = 0.50
Asset (B)
E(RB) = 8%
(sB) = 5%
WB = 0.50
Cov A,B = 0.0008
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____
____
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2. Refer to Exhibit 7-1. What is the expected return of a portfolio of two risky assets if the expected return E(Ri),
standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above?
a. 5%
b. 8%
c. 10%
d. 11%
e. 12%
3. Refer to Exhibit 7-1. What is the standard deviation of this portfolio?
a. 4.06%
b. 3.89%
c. 6.21%
d. 4.82%
e. 5.64%
4. The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a
a. Zero beta model.
b. An unstable beta or a higher borrowing rate.
c. Zero beta model or a higher borrowing rate.
d. higher borrowing rate.
e. An unstable beta.
5. Recently you have received a tip that the stock of Bubbly Incorporated is going to rise from $10.00 to $12.00
per share over the next year. You know that the annual return on the S&P 500 has been 12% and the 90-day
T-bill rate has been yielding 4% per year over the past 10 years. If beta for Bubbly is 1.2, will you purchase
the stock?
a. Yes, because it is overvalued.
b. Yes, because it is undervalued.
c. No, because it is undervalued.
d. No, because it is overvalued.
e. Yes, because the expected return equals the estimated return.
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6. The equation for the single-index market model is
a. RFRit = ai + bRmt + et
b. Rit = ai + bRmt + et
c. Rit = ai + bRFRt + et
d. Rmt = ai + bRit + et
e. Rit = ai + b(Rmt - RFRt)+ et
7. Under the following conditions, what are the expected returns for stock X and Y?



a.
b.
c.
d.
e.
0
1
2
= 0.06
= 0.02
= 0.04
13.2% and 18.2%
15.6% and 18.2%
13.2% and 15.6%
18.2% and 16.4%
None of the above
b
b
b
b
x,1
x,2
y,1
y,2
=
=
=
=
0.80
1.40
1.60
2.25
Sample Questions - Test #1 - Finance 450 - Fall 2003
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
A
C
A
C
B
B
A