Assignment 2
These are the instructions for the assignment.
a) The assignment has been uploaded to e-campus at the announcement section.
b) Please submit your assignment by 2024.04.18. No lateness will be accepted
c) Please do not submit the answers directly to me or to my email. The assignment has
been created as a quiz on e-campus. Please input your answers directly in the created
quiz by the deadline. I advise that you first download the assignment from the notice
board, solve them and then proceed to input your answers in the quiz.
1) Which of the following statement(s) is(are) true?
1. The real rate of interest is determined by the supply and demand for funds.
2. The real rate of interest is determined by the expected rate of inflation.
3. The real rate of interest can be affected by actions of the Fed.
4. The real rate of interest is equal to the nominal interest rate plus the expected rate of
inflation.
A) I and II only
B) I and III only
C) III and IV only
D) II and III only
E) I, II, III, and IV only
2) You purchased a share of stock for $25. One year later, you received $1 as a dividend and
sold the share for $29. What was your holding-period return?
A) 45%
B) 20%
C) 5%
D) 40%
E) None of the options are correct.
3) Other things equal, an increase in the government budget deficit:
A) drives the interest rate down.
B) drives the interest rate up.
C) might not have any effect on interest rates.
D) increases business prospects.
E) None of the options are correct.
4) Historical records regarding return on stocks, Treasury bonds, and Treasury bills between
1926 and 2021 show that:
A) stocks offered investors greater rates of return than bonds and bills.
B) stock returns were less volatile than those of bonds and bills.
C) bonds offered investors greater rates of return than stocks and bills.
D) bills outperformed stocks and bonds.
E) Treasury bills always offered a rate of return greater than inflation.
5) You have been given this probability distribution for the holding-period return for KMP
stock:
Stock of the Economy Probability HPR
Boom 0.30 18%
Normal growth 0.50 12%
Recession 0.20 –5%
What is the expected variance for KMP stock?
A) 0.6604%
B) 0.6996%
C) 0.7704%
D) 0.6372%
E) 0.7845%
6) If a portfolio had a return of 18%, the risk-free asset return was 5%, and the standard
deviation of the portfolio's excess returns was 34%, the risk premium would be:
A) 13%.
B) 18%.
C) 49%.
D) 12%.
E) 29%.
7) If the annual real rate of interest is 2.5%, and the expected inflation rate is 1.0%, the nominal
rate of interest would be approximately:
A) 3.5%.
B) 2.5%.
C) 1%.
D) 6.8%.
E) None of the options are correct.
8) Which of the following measures of risk best highlights the potential loss from extreme
negative returns?
A) Standard deviation
B) Variance
C) Upper partial standard deviation
D) Value at risk (VaR)
E) None of the options are correct.
9) When assessing tail risk by looking at the 1% worst-case scenario, the VaR is the:
A) most realistic, as it is the most complete measure of risk.
B) most pessimistic, as it is the most complete measure of risk.
C) most optimistic, as it is the most complete measure of risk.
D) most optimistic, as it takes the highest return (smallest loss) of all the cases.
E) None of the options are correct.
10) Which of the following statements regarding risk-averse investors is true?
A) They only care about the rate of return.
B) They accept investments that are fair games.
C) They only accept risky investments that offer risk premiums over the risk-free rate.
D) They are willing to accept lower returns and high risk.
E) They only care about the rate of return, and they accept investments that are fair
games.
11) In the mean-standard deviation graph, which one of the following statements is true
regarding the indifference curve of a risk-averse investor?
A) It is the locus of portfolios that have the same expected rates of return and different
standard deviations.
B) It is the locus of portfolios that have the same standard deviations and different rates
of return.
C) It is the locus of portfolios that offer the same utility according to returns and
standard deviations.
D) It connects portfolios that offer increasing utilities according to returns and standard
deviations.
E) None of the options are correct.
12) Assume an investor with the following utility function: U = E(r) − 0.6(σ2).
To maximize her expected utility, she would choose the asset with an expected rate of return
of _________ and a standard deviation of _________, respectively.
A) 12%; 20%
B) 10%; 15%
C) 10%; 10%
D) 8%; 10%
13) Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation
of 0.15, that lies on a given indifference curve. Which one of the following portfolios might
lie on the same indifference curve for a risk averse investor?
A) E(r) = 0.15; Standard deviation = 0.20
B) E(r) = 0.15; Standard deviation = 0.10
C) E(r) = 0.10; Standard deviation = 0.10
D) E(r) = 0.20; Standard deviation = 0.15
E) E(r) = 0.10; Standard deviation = 0.20
14) An investor invests 40% of her wealth in a risky asset with an expected rate of return of 0.15
and a variance of 0.04 and 60% in a T-bill that pays 6%. Her portfolio's expected return and
standard deviation are _________ and _________ , respectively.
A) 0.114; 0.12
B) 0.096; 0.08
C) 0.295; 0.06
D) 0.087; 0.12
E) None of the options are correct.
15) You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P,
constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40,
respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an
expected rate of return of 0.10 and a variance of 0.0081.
What would be the dollar value of your positions in X, Y, and the T-bills, respectively, if you
decide to hold a portfolio that has an expected outcome of $1,120?
A) $568; $378; $54
B) $568; $54; $378
C) $378; $54; $568
D) $108; $514; $378
E) Cannot be determined.
16) Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets
( P) and T-Bills. The information below refers to these assets.
E(Rp) 12.00%
Standard Deviation of P 7.20%
T-Bill rate 3.60%
Proportion of Complete Portfolio in 80%
P
Proportion of Complete Portfolio in 20%
T-Bills
Composition of P:
Stock A 40.00%
Stock B 25.00%
Stock C 35.00%
Total 100.00%
What is the standard deviation of Bo's complete portfolio?
A) 7.20%
B) 5.40%
C) 6.92%
D) 4.98%
E) 5.76%
17) The capital market line
1. is a special case of the capital allocation line.
2. represents the opportunity set of a passive investment strategy.
3. has the one-month T-Bill rate as its intercept.
4. uses a broad index of common stocks as its risky portfolio.
A) I, III, and IV
B) II, III, and IV
C) III and IV
D) I, II, and III
E) I, II, III, and IV
18) For capital investments where the forecasted return is below the investor’s required return
and above the capital market line, the investment is likely _________.
A) overvalued
B) undervalued
C) properly valued
D) ambiguous
E) None of the options are correct.
19) Market risk is also referred to as:
A) systematic risk or diversifiable risk.
B) systematic risk or nondiversifiable risk.
C) unique risk or nondiversifiable risk.
D) unique risk or diversifiable risk.
E) None of the options are correct.
20) Consider an investment opportunity set formed with two securities that are perfectly
negatively correlated. The global-minimum variance portfolio has a standard deviation that is
always:
A) greater than zero.
B) equal to zero.
C) equal to the sum of the securities' standard deviations.
D) equal to 1.
E) equal to −1.
21) Consider the following probability distribution for stocks A and B:
State Probability Return on Stock Return on Stock
A B
1 0.10 10% 8%
2 0.20 13% 7%
3 0.20 12% 6%
4 0.30 14% 9%
5 0.20 15% 8%
The standard deviations of stocks A and B are _____ and _____, respectively.
Note:Do not round intermediate calculations.
A) 1.5%; 1.9%
B) 2.5%; 1.1%
C) 3.2%; 2.0%
D) 1.5%; 1.1%
E) None of the options are correct.
22) Consider the following probability distribution for stocks A and B:
State Probability Return on Stock Return on Stock
A B
1 0.10 10% 8%
2 0.20 13% 7%
3 0.20 12% 6%
4 0.30 14% 9%
5 0.20 15% 8%
Let G be the global minimum variance portfolio. The weights of A and B in G are
__________ and __________, respectively.
Note: Do not round intermediate calculations.
A) 0.40; 0.60
B) 0.66; 0.34
C) 0.34; 0.66
D) 0.77; 0.23
E) 0.24; 0.76
23) An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio
on the capital allocation line must:
A) lend some of the money at the risk-free rate.
B) borrow some money at the risk-free rate and invest in the optimal riskless portfolio.
C) invest only in risk-free securities.
D) borrow some money at the risk-free rate, invest in the optimal risky portfolio, and
invest only in risky securities
E) Such a portfolio cannot be formed.
24) Which one of the following portfolios cannot lie on the efficient frontier as described by
Markowitz?
Portfolio Expected Standard Deviation
Return
W 9% 21%
X 5% 7%
Y 15% 36%
Z 12% 15%
A) Only portfolio W cannot lie on the efficient frontier.
B) Only portfolio X cannot lie on the efficient frontier.
C) Only portfolio Y cannot lie on the efficient frontier.
D) Only portfolio Z cannot lie on the efficient frontier.
E) Cannot be determined from the information given.
