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busfin3222 midterm2
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1. The arithmetic average of -11%, 15%, and 20% is ________.
8%
2. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?
9.2%
3. If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?
8.74%
4.A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____.
.42
5. The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been _________.
$2
6.An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively.
12%; 15.7%
7.The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been _________.
$31.50
8. 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 _________.
C. .50
9. You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________.
B. $150; $100
10. You have the following rates of return for a risky portfolio for several recent years:
If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be worth ___________.
B. $1,785.56
11. A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____.
B. 95.44%
12. The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?
B. .6
13. What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%?
C. 4.74%
14. What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%?
C. 8.47%
15. A loan for a new car costs the borrower .8% per month. What is the EAR?
D. 10.03%
16. Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?
A. Dollar-weighted return
17. Published data on past returns earned by mutual funds are required to be ______
B. geometric returns
18. The geometric average of -12%, 20%, and 25% is _________.
C. 9.7%
19. An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______.
B. 11.32%
20. 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?
C. 13.17%
21.Based on the outcomes in the following table, choose which of the statements below is (are) correct?I. The covariance of security A and security B is zero.II. The correlation coefficient between securities A and C is negative.III. The correlation coefficient between securities B and C is positive.
B. I and II only
22.Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.
A. asset A
23.Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?
A. .40
24.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 .0030, the correlation coefficient between the returns on A and B is _________.
C. .60
25.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.
B. 19.76%
26.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 weights first.)
B. 16%
This stock has greater systematic risk than a stock with a beta of _
A. .50
28. The characteristic line for this stock is Rstock = ___ + ___ Rmarket
B. 4.05; 1.32
29. _______________ percent of the variance is explained by this regression.
A. 12
30.The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?
B. .45
31.A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment?
D. 73%
32.A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project?
B. 25%
33.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 _________.
B. 3.7%
34.The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________.
B. buy stock X because it is underpriced
35.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, _________.
C. SDA Corp. stock's alpha is -.75%
36. (GRAPH) What is the expected return on the market?
C. 10%
37. (graph) What is the alpha of a portfolio with a beta of 2 and actual return of 15%?
A. 0%
38.Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% 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?
A. Advisor A was better because he generated a larger alpha.
39.You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return?
A. 1%
40.If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index?
B. 1
41.There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model?
D. E(rP) = 5 + 8.71βP1 + 9.68βP2
42.Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?
B. 12.9%
43.If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%.
D. Option D (30/2.5 15/1)
44.Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________.
C. B; it offers an expected excess return of 1.8%
45.In a simple CAPM world which of the following statements is (are) correct?
D. I, II, III, and IV
46.If all investors become more risk averse, the SML will _______________ and stock prices will _______________.
C. have the same intercept with a steeper slope; fall
47.If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________
A. expected returns to fall; risk premiums to fall
48.You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis?
B. $6,000,000
49.If the U.S. capital markets are not informationally efficient, ______.
A. the markets cannot be allocation ally efficient
50.Value stocks may provide investors with better returns than growth stocks if:I. Value stocks are out of favor with investors.II. Prices of growth stocks include premiums for overly optimistic growth levels.III. Value stocks are likely to generate positive-earnings surprises.
D. I, II, and III
51.When the market risk premium rises, stock prices will ________.
B. fall
52.The semistrong form of the EMH states that ________ must be reflected in the current stock price.
B. all publicly available information
53.The strong form of the EMH states that ________ must be reflected in the current stock price.
C. all information, including inside information
54.Proponents of the EMH typically advocate ________
C. a passive investment strategy
55.The primary objective of fundamental analysis is to identify _________
C. mispriced stocks
56.If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders.
A. semistrong
57.If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders.
B. strong
58.__________ is the return on a stock beyond what would be predicted from market movements alone.
C. An abnormal return
59.You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH.
C. weak
60.A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund.
B. index
61.Choosing stocks by searching for predictable patterns in stock prices is called ________.
B. technical analysis
62.Most people would readily agree that the stock market is not _________.
C. strong-form efficient
63.Small firms have tended to earn abnormal returns primarily in __________.
A. the month of January
64.Proponents of the EMH think technical analysts __________.
D. are wasting their time
65.Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.
c.use a passive trading strategy such as purchasing an index fund or an ETF
66.According to the semistrong form of the efficient markets hypothesis, ____________.
B. future changes in stock prices cannot be predicted from any information that is publicly available
67.Among the important characteristics of market efficiency is (are) that:I. There are no arbitrage opportunities.II. Security prices react quickly to new information.III. Active trading strategies will not consistently outperform passive strategies.
D. I, II, and III
68.Which of the following is not a concept related to explaining abnormal excess stock returns?
D. Preferred stock effect
69.According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits?
d. Engaging in active portfolio management to enhance returns
70.The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________.
B. liquidity effect
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