Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1) Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with
higher expected returns.
2) For large portfolios, investors should expect a higher return for higher volatility, but this does not hold true
for individual stocks.
3) A portfolio comprises two stocks, A and B, with equal amounts of money invested in each. If stock A’s
stock price increases and that of stock B decreases, the weight of stock A in the portfolio will increase.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
4) A portfolio has three stocks 200 shares of Yahoo (YHOO), 100 Shares of General Motors (GM), and 50
shares of Standard and Poor’s Index Fund (SPY). If the price of YHOO is $30, the price of GM is $30, and the
price of SPY is $130, calculate the portfolio weight of YHOO and GM.
A) 38.7%, 19.4%
B) 21.3%, 35.2%
C) 11.7%, 12.7%
D) 36.2%, 21.6%
5) A portfolio has three stocks 300 shares of Yahoo (YHOO), 300 Shares of General Motors (GM), and 100
shares of Standard and Poor’s Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the
price of SPY is $150, calculate the portfolio weight of YHOO and GM.
A) 10%, 20%
B) 15%, 25%
C) 20%, 30%
D) 20%, 40%
6) A portfolio has three stocks 100 shares of Yahoo (YHOO), 200 Shares of General Motors (GM), and 50
shares of Standard and Poor’s Index Fund (SPY). If the price of YHOO is $20, the price of GM is $20, and the
price of SPY is $130, calculate the portfolio weight of YHOO and GM.
A) 12%, 17%
B) 11%, 31%
C) 15%, 29%
D) 16%, 32%
7) Suppose you invest in 100 shares of Harley–Davidson at $40 per share and 200 shares of Yahoo at $25 per
share. If the price of Harley–Davidson increases to $50 and the price of Yahoo decreases to $20 per share,
what is the return on your portfolio?
A) 0%
B) 12.%
C) –10%
D) –5%
8) Suppose you invest in 200 shares of Johnson and Johnson at $70 per share and 200 shares of Yahoo at $20 per
share. If the price of Johnson and Johnson increases to $80 and the price of Yahoo decreases to $18 per
share, what is the return on your portfolio?
A) 12.21%
B) 8.89%
C) 9.76%
D) 11.21%
9) Suppose you invest in 100 shares of Merck at $40 per share and 100 shares of Yahoo at $25 per share. If the
price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your
portfolio?
A) 9.45%
B) 5.39%
C) 3.08%
D) 4.12%
10) Your retirement portfolio comprises 100 shares of the Standard & Poor’s 500 fund (SPY) and 100 shares of
iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $120 and that of AGG is $98. If you
expect the return on SPY to be 10% in the next year and the return on AGG to be 5%, what is the expected
return for your retirement portfolio?
A) 7.75%
B) 8.82%
C) 6.65%
D) 7.01%
11) Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays
Aggregate Bond Fund (AGG). The price of SPY is $140 and that of AGG is $ 95. If you expect the return on
SPY to be 15% in the next year and the return on AGG to be 8%, what is the expected return for your
retirement portfolio?
A) 12.52%
B) 11.67%
C) 13.71%
D) 12.25%
12) Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays
Aggregate Bond Fund (AGG). The price of SPY is $130 and that of AGG is $ 105. If you expect the return
on SPY to be 9% in the next year and the return on AGG to be 7%, what is the expected return for your
retirement portfolio?
A) 7.81%
B) 9.64%
C) 8.94%
D) 8.42%
13) The price of Microsoft is $35 per share and that of Apple is $60 per share. The price of Microsoft increases to
$37 per share after one year and to $40 after two years. Also, shares of Apple increase to $65 after one year
and to $70 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio
return in year 1 and year 2? Assume no dividends are paid.
A) 7.37%, 7.84%
B) 11.21%, 8.81%
C) 9.62%, 11.34%
D) 9.01%, 13.62%
14) The price of Microsoft is $30 per share and that of Apple is $50 per share. The price of Microsoft increases to
$35 per share after one year and to $40 after two years. Also, shares of Apple increase to $60 after one year
and to $70 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio
return in year 1 and year 2? Assume no dividends are paid.
A) 18.01%, 14.52%
B) 18.75%, 15.79%
C) 19.97%, 17.85%
D) 18.62%, 17.75%
15) The price of Microsoft is $40 per share and that of Apple is $45 per share. The price of Microsoft increases to
$45 per share after one year and to $50 after two years. Also, shares of Apple increase to $50 after one year
and to $60 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio
return in year 1 and year 2? Assume no dividends are paid.
A) 11.21%, 14.53%
B) 9.91%, 17.96%
C) 11.76%, 15.79%
D) 10.05%, 18.76%
16) Which of the following statements is FALSE?
A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are
above the overall portfolio return.
B) The expected return of a portfolio is simply the weighted average of the expected returns of the
investments within the portfolio.
C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the
different individual investments in the portfolio.
D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual
investment in the portfolio.
17) Which of the following equations is INCORRECT?
A)
xi =
B) Rp = Σi xiRi
C)
Rp = x1R1 + x2R2 + … + xnRn
D) E[Rp} = E[Σi xiRi]
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.
18) The weight of Abbott Labs in your portfolio is:
A) 50%
B) 40%
C) 30%
D) 20%
19) The weight of Lowes in your portfolio is:
A) 40%
B) 20%
C) 50%
D) 30%
20) The weight of Ball Corporation in your portfolio is:
A) 50%
B) 40%
C) 20%
D) 30%
21) Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 20%, and Abbott Labs has a
return of –10%. The return on your portfolio over the year is:
A) 0%
B) 7.5%
C) 3.5%
D) 5.0%
22) Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 20%, and Abbott Labs has a
return of –10%. The value of your portfolio over the year is:
A) $21,000
B) $20,000
C) $20,700
D) $21,500
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
23) What role does the correlation of two assets play in computation of the expected return of the two asset
portfolio?
24) What role does the standard deviations of two assets play in computation of the expected return of the two
asset portfolio?
25) In a two asset portfolio, what happens to the portfolio weight of the better performing asset?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
26) When we combine stocks in a portfolio, the amount of risk that is eliminated depends on the degree to which
the stocks face common risks and move together.
27) If two stocks are perfectly negatively correlated, a portfolio with equal weighting in each stock will always
have a volatility (standard deviation) of 0.
28) Correlation is the degree to which the returns of two stocks share common risks.
29) When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the
portfolio, the volatility of the portfolio also increases.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
30) A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and
MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.3. What is the
standard deviation of the portfolio?
A) 22.35%
B) 26.15%
C) 30.23%
D) 29.67%
31) A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and
MSFT are 40% and 30%, respectively, and the correlation between IBM and MSFT is –0.3. What is the
standard deviation of the portfolio?
A) 19.95%
B) 18.65%
C) 22.17%
D) 20.18%
32) A portfolio has 50% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and
MSFT are 39% and 35%, respectively, and the correlation between IBM and MSFT is 0. What is the standard
deviation of the portfolio?
A) 22..7%
B) 29.5%
C) 37.5%
D) 26.2%
33) The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold
both stocks in my portfolio, the overall volatility of the portfolio is
A) 30%.
B) 26%.
C) 28%.
D) more information needed
34) The volatility of Home Depot Share prices is 30% and that of General Motors shares is 30%. When I hold
both stocks in my portfolio and the stocks returns have zero correlation, the overall volatility of returns of the
portfolio is
A) unchanged at 30%.
B) less than 30%.
C) more than 30%.
D) cannot say for sure
35) The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold
both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of
the portfolio is
A) more than 30%.
B) less than 30%.
C) unchanged at 30%.
D) cannot say for sure
36) The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold
both stocks in my portfolio with an equal amount in each, and the stocks returns have a correlation of minus
1, the overall volatility of returns of the portfolio is
A) more than 30%.
B) unchanged at 30%.
C) zero.
D) cannot say for sure
37) Diversification reduces the risk of a portfolio because ________ and some of the risks are averaged out of the
portfolio.
A) stocks do not move identically
B) stocks have common risks
C) stocks are unpredictable
D) stocks are always effected by the market
38) Stocks tend to move together if they are affected by
A) company specific events.
B) common economic events.
C) unrelated to the economy.
D) idiosyncratic shocks.
39) We can reduce volatility by investing in less than perfectly correlated assets through diversification because
the expected return of a portfolio is the weighted average of the expected returns of its stocks, but the
volatility of a portfolio
A) is higher than the weighted average volatility.
B) is independent of weights in the stocks.
C) is less than the weighted average volatility.
D) depends on the expected return.
40) As we add more uncorrelated stocks to a portfolio where the stocks are held in equal weights, the benefit of
diversification is most dramatic
A) after 20 stocks have been added.
B) when there are more than 500 stocks.
C) when there are more than 1000 stocks.
D) at the outset.
41) Which of the following statements is FALSE?
A) The covariance and correlation allow us to measure the co–movement of returns.
B) Correlation is the expected product of the deviations of two returns.
C) Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio.
D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face
common risks and their prices move together.
42) Which of the following statements is FALSE?
A) While the sign of the correlation is easy to interpret, its magnitude is not.
B) Independent risks are uncorrelated.
C) When the covariance equals 0, the returns are uncorrelated.
D) To find the risk of a portfolio, we need to know more than the risk and return of the component stocks;
we need to know the degree to which the stocks’ returns move together.
43) Which of the following statements is FALSE?
A) Stock returns will tend to move together if they are affected similarly by economic events.
B) Stocks in the same industry tend to have more highly correlated returns than stocks in different
industries.
C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to
move together.
D) With a positive amount invested in each stock, the more the stocks move together and the higher their
covariance or correlation, the more variable the portfolio will be.
44) Which of the following statements is FALSE?
A) A stock’s return is perfectly positively correlated with itself.
B) When the covariance equals 0, the stocks have no tendency to move either together or in opposition of
one another.
C) The closer the correlation is to –1, the more the returns tend to move in opposite directions.
D) The variance of a portfolio depends only on the variance of the individual stocks.
45) Which of the following statements is FALSE?
A) If two stocks move in opposite directions, one will tend to be above average when to other is below
average, and the covariance will be negative.
B) The correlation between two stocks has the same sign as their covariance, so it has a similar
interpretation.
C) The covariance of a stock with itself is simply its variance.
D) The covariance allows us to gauge the strength of the relationship between stocks.
46) Which of the following equations is INCORRECT?
A)
Cov(Ri,Rj) = Σ(Ri – Ri)(Rj – Rj)
B)
Var(Rp) = x12Var(R1) + x22Var(R2) + 2X1X2Cov(R1,R2)
C)
Corr(Ri,Rj) =
D) Cov(Ri,Rj) = E[(Ri – E[Ri])(Rj – E[Rj])]
Use the table for the question(s) below.
Consider the following returns:
Lowes
Realized
Return
Home Depot
Realized
Return
IBM
Realized
Return
20.1%
–14.6%
0.2%
72.7%
4.3%
–3.2%
–25.7%
–58.1%
–27.0%
56.9%
71.1%
27.9%
6.7%
17.3%
–5.1%
17.9%
0.9%
–11.3%
47) The covariance between Lowes’ and Home Depot’s returns is closest to:
A) 0.10
B) 0.29
C) 0.12
D) 0.69
48) The volatility on Lowes’ returns is closest to:
A) 35%
B) 10%
C) 13%
D) 42%
49) The volatility on Home Depot’s returns is closest to:
A) 35%
B) 31%
C) 42%
D) 18%
Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
Stock
Expected
Return
Standard
Deviation
Correlation with
Duke Energy
Correlation with
Microsoft
Correlation with
Wal–Mart
Duke Energy
14%
6%
1.0
–1.0
0.0
Microsoft
44%
24%
–1.0
1.0
0.7
Wal–Mart
23%
14%
0.0
0.7
1.0
50) The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A) 8%
B) 9%
C) 11%
D) 6%
51) The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A) 15%
B) 14%
C) 29%
D) 44%