Question 1

The geometric average of -12%, 20% and 25% is ________.
A) 8.42%
B) 11.00%
C) 9.70%
D) 18.88%

Accepted Answer

11ee763a_a7b9_65b6_90da_edeff7f88a55_TB10008_00

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%

Accepted Answer

11ee763a_a7b9_65b7_90da_d36ac466d906_TB10008_00

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

Accepted Answer

11ee763a_a7b9_65b9_90da_9b1fb2706ec7_TB10008_00

Question 4

The formula is used to calculate the ________. 
A) Sharpe measure
B) Treynor measure
C) Coefficient of variation
D) Real rate of return

Accepted Answer

The answer of The formula is used to calculate the...

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

Accepted Answer

I and II are correct because a higher standard deviation of returns indicates higher volatility, which typically requires a higher risk premium to compensate investors. It also means the range of potential returns is broader. III is not necessarily true because the Sharpe ratio also depends on the returns of the securities relative to their risk; a higher standard deviation does not guarantee a higher Sharpe ratio.

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%

Accepted Answer

11ee763a_a7b9_8ccb_90da_5d6d4de80e31_TB10008_00

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

Accepted Answer

The answer of You have the following rates of return...

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%

Accepted Answer

11ee763a_a7b9_b3de_90da_29eed37d7118_TB10008_00

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

Accepted Answer

The bid-ask spread is calculated as the difference between the ask price and the bid price. In this case, $15.14 (ask) - $15.12 (bid) = $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

Accepted Answer

The answer of Consider the following limit order book of...

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

Accepted Answer

The answer of Based on the outcomes in the table...

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

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

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

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.

The formula is used to calculate the ________.

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 ________.

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

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

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?

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