Deck 1: Securities Markets, Efficient Diversification, Risk and Return: Past and Prologue

Question 1

The geometric average of -12%, 20% and 25% is ________.

A) 8.42%
B) 11.00%
C) 9.70%
D) 18.88%

Answer 1

9.70%

Question 2

You have an APR of 7.5% with continuous compounding. The EAR is ________.

A) 7.50%
B) 7.65%
C) 7.79%
D) 8.25%

Answer 2

7.79%

Question 3

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: An investor with a risk aversion of A = 3 would find that ________ on a risk-return basis.

A) only Asset A is acceptable
B) only Asset B is acceptable
C) neither Asset A nor Asset B is acceptable
D) both Asset A and Asset B are acceptable

Answer 3

neither Asset A nor Asset B is acceptable

Question 4

The formula is used to calculate the ________.

A) Sharpe measure
B) Treynor measure
C) Coefficient of variation
D) Real rate of return

Question 5

Security A has a higher standard deviation of returns than Security B We would expect that ________.
I. Security A would have a higher risk premium than Security B
II. the likely range of returns for Security A in any given year would be higher than the likely range of returns for Security B
III. the Sharpe measure of A will be higher than the Sharpe measure of B.

A) I only
B) I and II only
C) II and III only
D) I, II and III

Question 6

You are considering investing $1000 in a complete portfolio. The complete portfolio is composed of Treasury notes 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%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately ________ in the risky portfolio. This will mean you will also invest approximately ________ and ________ of your complete portfolio in security X and Y respectively.

A) 0%, 60%, 40%
B) 25%, 45%, 30%
C) 40%, 24%, 16%
D) 50%, 30%, 20%

Question 7

You have the following rates of return for a risky portfolio for several recent years: If you invested $1 000 at the beginning of 2005 your investment at the end of 2008 would be worth ________.

A) $2 176.60
B) $1 785.56
C) $1 645.53
D) $1 247.87

Question 8

You have the following rates of return for a risky portfolio for several recent years: The annualised average return on this investment is ________.

A) 16.15%
B) 16.87%
C) 21.32%
D) 15.60%

Question 9

If the bid price is $15.12 and the ask price is $15.14, the bid-ask spread is ________.

A) $0.03
B) $0.01
C) $0.04
D) $0.02

Question 10

Consider the following limit order book of a specialist. The last trade in the share occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

A) $39.75
B) $40.25
C) $40.375
D) $40.25 or less

Question 11

Based on the outcomes in the table below choose which of the statements is/are correct:

I. The covariance of Security A and Security B is zero
II. The correlation coefficient between Security A and C is negative
III. The correlation coefficient between Security B and C is positive

A) I only
B) I and II only
C) II and III only
D) I, II and III