Question 1

Assuming that Tom wants to maintain the current volatility of his portfolio,then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:
A)13%
B)15%
C)16%
D)12%

Accepted Answer

The max expected return that can be achieved by investing in the market portfolio and risk-free investment is given by the Capital Market Line (CML), which is a linear relationship between expected return and standard deviation. Given that Tom wants to maintain the current volatility of his portfolio, he can invest in the market portfolio and risk-free asset in such a way that the expected return lies on his current portfolio's efficient frontier. From the graph (or calculation), the expected return on Tom's efficient frontier is around 15%. Therefore, the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to B)15%.

Question 2

Use the following information to answer the question(s)below.
Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks.Assume that these two portfolios are equal in size (market value),the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics:
  The risk free rate is 3.5%.
-The Sharpe ratio for the market (which is a 50-50 combination of the value and growth portfolios)portfolio is closest to:
A).53
B).58
C).61
D).79

Accepted Answer

B)expected return = .50(12%)+ .50(15%)= 13.5% σ_p² = x₁² [(SD(R₁))]² + x₂² [(SD(R₂))]² + 2x₁x₂ Corr(R₁,R₂)SD(R₁)SD(R₂) = [(.5)]² [(.14)]² + [(.5)]²[(.24)]² + 2(.5)(.5)(.6)... Sharpe Ratio = 11ea7cce_3d2f_5236_928c_2786fb7fe1b1_TB1626_11 = 11ea7cce_3d2f_5237_928c_475b384f1cf6_TB1626_11 = 0.583410

Question 3

Which of the following statements is FALSE?
A)The expected return of a portfolio should correspond to the portfolio's beta.
B)Graphically the line through the risk-free investment and the market portfolio is called the capital market line (CML).
C)The beta of a portfolio is the weighted average beta of the securities in the portfolio.
D)By holding a negative beta security,an investor can reduce the overall market risk of her portfolio.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)The...

Question 4

You currently own $100,000 worth of Wal-Mart stock.Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%.The market portfolio has an expected return of 12% and a volatility of 16%.The risk-free rate is 5%.Assuming the CAPM assumptions hold,what alternative investment has the highest possible expected return while having the same volatility as Wal-Mart? What is the expected return of this portfolio?

Accepted Answer

The answer of You currently own $100,000 worth of Wal-Mart...

Question 5

Monsters' beta with the market is closest to:
A)1.3
B)1.0
C)0.6
D)0.8

Accepted Answer

The answer of Monsters' beta with the market is closest...

Question 6

The beta for the risk free investment is closest to:
A)1
B)0
C)Unable to answer this question without knowing the risk free rate
D)Unable to answer this question without knowing the markets volatility

Accepted Answer

The beta of a risk-free investment is always 0 as it does not have any correlation with the market.

Question 7

Which of the following equations is INCORRECT? A)E[R_xCML] = r_f + x(E[R_Mkt] + r_f) B)r_i = r_f + b(E[R_Mkt] - r_f) C)SD(R_xCML)= xSD(R_Mkt) D)E[R_xCML] = (1 - x)r_f + xE[R_Mkt]

Accepted Answer

A)E[R_xCML] = r_f + x(E[R_Mkt] - r_f)

Question 8

Assuming that Tom wants to maintain the current expected return on his portfolio,then the minimum volatility that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:
A)20%
B)25%
C)22%
D)18%

Accepted Answer

The answer of Assuming that Tom wants to maintain the...

Question 9

You currently own $100,000 worth of Wal-Mart stock.Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%.The market portfolio has an expected return of 12% and a volatility of 16%.The risk-free rate is 5%.Assuming the CAPM assumptions hold,what alternative investment has the lowest possible volatility while having the same expected return as Wal-Mart? What is the volatility of this portfolio?

Accepted Answer

The answer of You currently own $100,000 worth of Wal-Mart...

Question 10

Assuming that Tom wants to maintain the current volatility of his portfolio,then the amount that Tom should invest in the market portfolio to maximize his expected return is closest to:
A)72%
B)92%
C)110%
D)140%

Accepted Answer

D)SD(R_xCML)= xSD(R_Mkt) .25 = x(.18)→ x = .25/.18 = 1.39

Question 11

Which of the following statements is FALSE?
A)The market portfolio is the efficient portfolio.
B)Many practitioners believe it is sensible to use the CAPM and the security market line as a practical means to estimate a stock's required return and therefore a firm's equity cost of capital.
C)If we plot individual securities according to their expected return and beta,the CAPM implies that they should all fall along the CML.
D)As savvy investors attempt to trade to improve their portfolios,they raise the price and lower the expected return of the positive alpha stocks,and they depress the price and raise the expected return of negative alpha stocks,until the stocks are once again on the security market line and the market portfolio is efficient.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)The...

Question 12

The beta for the market portfolio is closest to:
A)1
B)0
C)Unable to answer this question without knowing the markets expected return
D)Unable to answer this question without knowing the markets volatility

Accepted Answer

The market portfolio by definition has a beta of 1, meaning it moves in perfect tandem with the overall market.

Question 13

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-Suppose that Google stock has a beta of 1.06 and Boeing stock has a beta of 1.31.If the risk-free interest rate is 4% and the expected return from the market portfolio is 12%,then the expected return on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest to:
A)12.5%
B)13.1%
C)13.5%
D)13.9%

Accepted Answer

The answer of Use the following information to answer the...

Question 14

Which of the following statements is FALSE?
A)To improve the performance of their portfolios,investors who are holding the market portfolio will compare the expected return of each security with its required return from the security market line.
B)The Sharpe ratio of a portfolio will increase if we sell stocks with positive alphas.
C)When a stock's alpha is not zero,investors can improve upon the performance of the market portfolio.
D)When the market portfolio is efficient,all stocks are on the security market line and have an alpha of zero.

Accepted Answer

Selling stocks with positive alphas would decrease the overall alpha of the portfolio, therefore decreasing the Sharpe ratio.

Question 15

Assuming that Tom wants to maintain the current expected return on his portfolio,then the amount that Tom should invest in the market portfolio to minimize his volatility is closest to:
A)100%
B)90%
C)125%
D)110%

Accepted Answer

D)E[R_xCML] = r_f + x(E[R_Mkt] - r_f) .13 = .04 + x(.12 - .04) x = .09/.08 = 1.125

Question 16

Which of the following statements is FALSE?
A)We can improve the performance of our portfolio by selling stocks with negative alphas.
B)The market portfolio is on the SML,and according to the CAPM,since all other portfolios are inefficient they will not fall on the SML.
C)The difference between a stock's expected return and its required return according to the security market line is called the stock's alpha.
D)The risk premium for any security is proportional to its beta with the market.

Accepted Answer

This statement is false because according to the CAPM, all portfolios including the market portfolio should fall on the SML as they are all efficient portfolios.

Question 17

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-Suppose that Google stock has a beta of 1.06 and Boeing stock has a beta of 1.31.The beta on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest to:
A)1.06
B)1.14
C)1.19
D)1.24

Accepted Answer

The answer of Use the following information to answer the...

Question 18

Monsters' required return is closest to:
A)10.0%
B)13.0%
C)11.5%
D)15.5%

Accepted Answer

Monsters Inc.'s required return can be calculated using the CAPM formula:
Required return = risk-free rate + beta(market risk premium)
Beta = correlation between Monsters Inc. and the market * (Monsters Inc. volatility / market volatility)
Beta = 0.60 * (0.24 / 0.18) = 0.80
Market risk premium = expected return of the market - risk-free rate
Market risk premium = 13% - 5% = 8%
Required return = 5% + 0.80(8%) = 11.4%
Therefore, Monsters Inc.'s required return is closest to 11.5% (choice C).

Question 19

Which of the following statements is FALSE?
A)The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate),divided by the amount of market risk present in the security's returns measured by its beta with the market.
B)We refer to the beta of a security with the market portfolio simply as the securities beta.
C)There is a linear relationship between a stock's beta and its expected return.
D)A security with a negative beta has a negative correlation with the market,which means that this security tends to perform well when the rest of the market is doing poorly.

Accepted Answer

The statement that risk premium is equal to the market risk premium divided by the amount of market risk present in the security's returns measured by its beta is incorrect. The risk premium of a security is equal to the expected return of the security minus the risk-free rate.

Question 20

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The Sharpe Ratio for Wyatt Oil is closest to:
A)0.40
B)0.48
C)0.56
D)0.80

Accepted Answer

The Sharpe Ratio is calculated as (Expected Return on Asset - Risk-Free Rate)/Volatility. 
For Wyatt Oil, we do not have the expected return or volatility information. Therefore, we cannot calculate the Sharpe Ratio for this asset.

Quiz 11: Optimal Portfolio Choice and the Capital Asset Pricing Model

Assuming that Tom wants to maintain the current volatility of his portfolio,then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:

Which of the following statements is FALSE?

Monsters' beta with the market is closest to:

The beta for the risk free investment is closest to:

Which of the following equations is INCORRECT?

Assuming that Tom wants to maintain the current expected return on his portfolio,then the minimum volatility that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:

Assuming that Tom wants to maintain the current volatility of his portfolio,then the amount that Tom should invest in the market portfolio to maximize his expected return is closest to:

Which of the following statements is FALSE?

The beta for the market portfolio is closest to:

Which of the following statements is FALSE?

Assuming that Tom wants to maintain the current expected return on his portfolio,then the amount that Tom should invest in the market portfolio to minimize his volatility is closest to:

Which of the following statements is FALSE?

Monsters' required return is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s) below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The Sharpe Ratio for Wyatt Oil is closest to: