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

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Question 21

Multiple Choice

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Use the table for the question(s) below. Consider the following returns: -The Correlation between Stock X's and Stock Y's returns is closest to:

A) 0.58
B) 0.29
C) 0.69
D) 0.10

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Question 22

Multiple Choice

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Use the table for the question(s) below. Consider the following covariances between securities: -Which of the following statements is FALSE?

A) The expected return of a portfolio is equal to the weighted average expected return, but the volatility of a portfolio is less than the weighted average volatility.
B) Each security contributes to the volatility of the portfolio according to its volatility, scaled by its covariance with the portfolio, which adjusts for the fraction of the total risk that is common to the portfolio.
C) Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification.
D) The overall variability of the portfolio depends on the total co-movement of the stocks within it.

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Question 23

Multiple Choice

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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 the market portfolio is closest to:

Which of the following statements is FALSE?

Use the table for the question(s) below. Consider the following returns: -The Volatility on Stock Z's returns is closest to:

Assuming that the risk-free rate is 4% and the expected return on the market is 12%, then calculate the required return on Mary's portfolio.

Use the table for the question(s) below. Consider the following returns: -The covariance between Stock X's and Stock Z's returns is closest to:

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?

The beta for the market portfolio is closest to:

Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. -The weight on Ball Corporation in your portfolio is:

Which of the following equations is INCORRECT?

Which of the following equations is INCORRECT?

Use the following information to answer the question(s) below. Your investment portfolio consists of $10,000 worth of Google stock. Suppose that the risk-free rate is 4%, Google stock has an expected return of 14% and a volatility of 35%, and the market portfolio has an expected return of 12% and a volatility of 18%. Assume that the CAPM assumptions hold. -The volatility of the alternative investment that has the lowest possible volatility while having the same expected return as Google is closest to:

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 expected return on the market portfolio (which is a 50-50 combination of the value and growth portfolios) is closest to:

Use the table for the question(s) below. Consider the following covariances between securities: -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 beta for Taggart Transcontinental is closest to:

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Use the table for the question(s) below. Consider the following three individuals portfolios consisting of investments in four stocks: -Assuming that the risk-free rate is 4% and the expected return on the market is 12%, then required return on Peter's portfolio is closest to:

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Consider a portfolio consisting of only Microsoft and Wal-Mart stock. Calculate the expected return on such a portfolio when the weight on Microsoft stock is 0%, 25%, 50%, 75%, and 100%