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Finance 355: Investments QUIZ 3 Quiz Paper A 1, Quiz Paper B 6 Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued? a. to the right of the overall market and above the SML b. to the right of the overall market and below the SML c. to the left of the overall market and above the SML d. to the left of the overall market and below the SML e. on the SML Quiz Paper A 2, Quiz Paper B 7 Wilson Farms’ stock has a beta of 1.5 and an expected return of 12%. The risk-free rate is 3% and the market risk premium is 7%. This stock is _____ because the CAPM return for the stock is _____ percent. a. undervalued; 7.5 b. undervalued; 9 c. fairly valued; 12 d. overvalued; 13.5 e. overvalued; 15 Quiz Paper A 3, Quiz Paper B 8 The following portfolio has 50% in stock A and 25% in each of stock B and C. What is the portfolio standard deviation? State of Economy Probability of State of Economy Stock A Returns Stock B Returns Stock C Returns Boom 0.5 10% 15% 20% Bust 0.5 8% 4% 0% a. 3.830% b. 6.187% c. 4.375% d. 0.191% e. 5.560% Quiz Paper A 4, Quiz Paper B 9 Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation? a. minimum variance portfolio b. Markowitz efficient frontier c. correlated market frontier d. asset allocation relationship e. diversified portfolio line Quiz Paper A 5, Quiz Paper B 10 A company announces that its earnings have decreased 25 percent from the previous year, but analysts actually expected a 50 percent decrease. What is the likely effect on the stock price? a. The stock price will increase. b. The stock price will decrease c. The stock price will increase or decrease. d. The stock price will not be affected. e. The stock price will increase, decrease, or remain constant. Quiz Paper A 6, Quiz Paper B 1 Of the following, Stock _____ has the greatest level of total risk and Stock _____ has the highest risk premium. a. A; B b. B; E 4 c. C; D d. D; C e. C; E Quiz Paper A 7, Quiz Paper B 2 Which of the following measures is best applied only to diversified portfolios? I. Sharpe ratio II. Treynor ratio III. Jensen’s alpha a. I only b. II only c. III only d. I and II only e. II and III only Quiz Paper A 8, Quiz Paper B 3 A share of stock sells for $30 today. The beta of the stock is 1.1, and the expected return on the market is 10%. The stock is expected to pay a dividend of $2 in one year. If the risk-free rate is 4%, what will the share price be in one year? a. $30.00 b. $30.11 c. $31.18 d. $33.18 e. $37.75 Quiz Paper A 9, Quiz Paper B 4 A Sharpe-optimal portfolio provides which one of the following for a given set of securities? a. highest possible rate of return b. highest possible level of risk c. highest level of return for a market-equivalent level of risk d. highest excess return per unit of systematic risk e. highest risk premium per unit of total risk Quiz Paper A 10, Quiz Paper B 5 The collection which represents all possible risk-return combinations which can be created from portfolios comprised of two individual assets is called the: a. minimum variance set. b. financial frontier. c. efficient portfolio. d. investment opportunity set. e. dominated set. Quiz Paper A 11, Quiz Paper B 16 What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called? a. efficient return b. correlated value c. risk premium d. expected return e. realized return Quiz Paper A 12, Quiz Paper B 17 Which one of the following is eliminated, or at least greatly reduced, by increasing the number of individual securities held in a portfolio? a. number of economic states b. various expected returns caused by changing economic states c. market risk d. diversifiable risk e. non-diversifiable risk Quiz Paper A 13, Quiz Paper B 18 The risk-free rate is 3.1 percent and the expected return on the market is 11 percent. Stock A has a beta of 1.34. For a given year, Stock A returned 16.7 percent while the market returned 12.2 percent. The systematic portion of Stock A’s unexpected return was _____ percent and the unsystematic portion was _____ percent. a. 1.41; 1.61 b. 1.61; 1.41 c. 1.61; 3.01 d. 1.41; 1.20 e. 4.62; 1.41 Quiz Paper A 14, Quiz Paper B 19 Which one of the following correlation coefficients can provide the greatest diversification benefit? a. -1.0 b. -0.5 c. 0.0 d. 0.5 e. 1.0 Quiz Paper A 15, Quiz Paper B 20 Susan has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an expected return of 4.8 percent. The risky asset has a beta of 1.2 and an expected return of 13.8 percent. What is the expected return on the portfolio if the portfolio beta is 1.02? a. 10.67 percent b. 11.14 percent c. 11.53 percent d. 11.88 percent e. 12.45 percent Answer the following three questions based on the information below Portfolio Return Standard Deviation Beta P 17% 20% 1.1 Q 24% 18% 2.1 R 11% 10% 0.5 S 16% 14% 1.5 The expected market return is 16% and risk-free rate is 5%. Quiz Paper A 16, Quiz Paper B 11 Assuming uncorrelated returns, the Sharpe ratio for a new portfolio with equal allocations to Portfolio P and Portfolio R is a. 0.63 b. 0.71 c. 0.81 d. 1.05 e. 1.40 Quiz Paper A 17, Quiz Paper B 12 Assuming uncorrelated returns, the Treynor ratio for a new portfolio with equal allocations to Portfolio Q and Portfolio S is a. 0.08 b. 0.42 c. 0.94 d. 1.05 e. 1.32 Quiz Paper A 19, Quiz Paper B 14 You are comparing three securities and discover they all have identical Sharpe ratios. Given this information, which one of the following must be true regarding these three securities? a. They have identical betas. b. They have the same rates of return. c. They earn identical rewards per unit of total risk. d. They earn identical rewards per unit of systematic risk. e. They have identical Treynor ratios also. Quiz Paper A 20, Quiz Paper B 15 According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of risk? a. unsystematic b. firm specific c. expected d. systematic e. diversifiable