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Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
An investor buys shares for £10 and sells them after two years for £15. At the end of each of the two
years the dividends paid are 10p and 20p respectively. What is the rate of return?
1)
A)
15%
B)
34%
C)
6%
D)
24%
2)
What is represented by Rp in the formula Rp = aRA + (1 - a) RB ?
2)
A)
Portfolio expected returns
B)
Internal rate of return
C)
Predicted rate of return
D)
Present rate of return
3)
A two-asset portfolio is made up of 80 per cent of Share A, for which the variance is 50%, and 20
per cent of Share B, with variance 60%. The covariance between the two shares is 25%. What is the
standard deviation of the two-asset portfolio?
3)
A)
87.54%
B)
65.12%
C)
73.23%
D)
91.63%
4)
Two constituents of a portfolio show perfectly positive correlation. What is the correlation
coefficient?
4)
A)
+1
B)
0
C)
-1
D)
+ infinity
1
5)
Which one of the following approaches will increase the level of risk, provided the constituents of a
portfolio are not perfectly positively correlated?
5)
A)
Make the statistical interdependence between the securities more negative
B)
Decreasing the number of securities
C)
Reduce diversification
D)
Identify high profit investments
6)
An investor decides to invest in shares in two companies, rather than in just one. The expected
returns of each company are RA and RB (where RB > RA). Which statement best describes RP, the
expected return from the portfolio?
6)
A)
RB< RP< RA
B)
RP < RA< RB
C)
RP =RA + RB
2
D)
RA< RP< RB
7)
Which three of the following statements are correct?
7)
A)
For a portfolio to be described as efficient there must be no other combinations of proportions
of the underlying investments which provide a higher return for the same risk.
B)
Portfolio returns are a weighted average of the expected returns on the individual
investments but portfolio standard deviation is more than the weighted average risk of the
individual investments.
C)
Both covariance and the correlation coefficient measure the degree to which returns move
together.
D)
The degree of risk reduction from diversification depends on the extent of statistical
interdependence between the returns of the different investments.
8)
What is X in the formula X =n
i=1[(RA-RA)(RB-RB) pi ] ?
8)
A)
Covariance between A and B
B)
Probability of positive covariance
C)
Correlation between A and B
D)
Deviation of the mean of A and B
2
9)
What term is used for the weighted average of the expected returns on the constituent investments?
9)
A)
Mean return
B)
Sum of the expected returns
C)
Portfolio expected return
D)
Market expected return
10)
Two companies operate in the same industry and tend to follow practically identical patterns of
performance. Which statement describes the relationship between the returns of the two
companies?
10)
A)
They show imperfect correlation.
B)
They are uncorrelated.
C)
They show perfect negative correlation.
D)
They show perfect positive correlation.
11)
What is the return if a share is bought for £8, a dividend is paid of 80p, and the share is sold for
£9.20 after one year?
11)
A)
20%
B)
10%
C)
30%
D)
25%
12)
A two-asset portfolio is made up of 60 per cent of funds with expected return 13 per cent, and 40
per cent of funds with expected return 15 per cent. What is the total return expected from the
portfolio?
12)
A)
13.8%
B)
12.8%
C)
18.8%
D)
14.8%
3
13)
Which two of the following options correctly give rules for portfolio management according to
mean-variance portfolio theory?
13)
A)
Portfolio standard deviation is less than the weighted average risk of the individual
investments,
except for perfectly positively correlated investments.
B)
Portfolio returns are a weighted average of the expected returns on the individual
investments.
C)
Portfolio standard deviation is greater than the weighted average risk of the individual
investments,
except for perfectly negatively correlated investments.
D)
Expected returns are a weighted average of the portfolio return on the group of investments.
14)
What is R, when calculated using the formula R=n
i=1
Ripi ?
14)
A)
Mean return
B)
Standard deviation
C)
Market rate return
D)
Expected return
15)
What is the standard deviation of the return of the following project?
Event Probability of
event occurring Return on
project (%) Expected return (%)
Booming economy 0.2 35 25
Growing economy 0.6 10 10
Declining economy 0.2 5 5
15)
A)
5.22%
B)
25.10%
C)
15.34%
D)
10.68%
16)
What are the possible values of covariance?
16)
A)
to 0
B)
-1 to + 1
C)
0 to +
D)
to +
4
17)
What can you conclude if the standard deviation of returns from Project X is smaller than the
standard deviation of returns from Project Y?
17)
A)
The expected returns from Project X are less predictable.
B)
Past returns from Project X are smaller.
C)
Returns from Project X are larger.
D)
The expected returns from Project X are easier to estimate.
18)
Which of the following statements is correct?
18)
A)
To achieve maximum attainable utility, always select a portfolio on a person’s highest
indifference curve.
B)
To achieve maximum utility, select the portfolio with the lowest risk.
C)
To achieve the highest utility, first choose the best efficiency frontier and then select the
highest returns portfolio.
D)
To achieve the highest utility, select the portfolio where the highest attainable indifference
curve is tangential to the efficiency frontier.
19)
What is R, as calculated by the formula R =D1+ P1- P0
P0, when P0 is the purchase price, P1 the
security's
value at the end of the one-year holding period, and D1 the dividend paid during the period?
19)
A)
The multi-period return
B)
The discount rate
C)
The one-year holding period return
D)
The internal rate of return
20)
What is the effect on outcomes if a portfolio has statistically independent shares from two
companies, and the expected returns are the same for both?
20)
A)
The expected return is halved but the standard deviation remains constant.
B)
The expected return is the same but the standard deviation increases.
C)
The expected return doubles but the standard deviation remains constant.
D)
The expected return is the same but the standard deviation is reduced.
5
21)
What is the range of possible values of the correlation coefficient?
21)
A)
0 to +1
B)
0 to + infinity
C)
-1 to +1
D)
- infinity to + infinity
22)
Which two of the following provide useful rules to assess the degree of risk reduction (provided
there is not perfectly positive correlation)?
22)
A)
The smaller the number of securities, the lower the risk.
B)
The more negative the correlation the better.
C)
The more positive the correlation the better.
D)
The greater the number of securities, the lower the risk.
23)
What does P0 represent in the formula for the one-year holding period return, R =D1 + P1- P0
P0 ?
23)
A)
Price after year one
B)
Issue price
C)
Purchase price
D)
Sale price
24)
The table shows share prices for two shares. What type of covariance do the figures suggest?
Share Jan Feb Mar Apr Jun
A50 60 70 60 40
B80 70 60 70 90
24)
A)
Perfectly positive
B)
Perfectly negative
C)
Zero
D)
Infinite
6
25)
Which two of the statements are correct?
25)
A)
For perfectly positive correlated investments portfolio standard deviation is equal to the
weighted average of the standard deviation of the constituent investment.
B)
For perfectly negatively correlated investments portfolio standard deviation is equal to the
weighted average of the standard deviation of the constituent investment.
C)
Portfolio standard deviation is usually greater than the weighted average of the standard
deviation of the constituent investments.
D)
Portfolio standard deviation is usually less than the weighted average of the standard
deviation of the constituent investments.
26)
Which two factors have the greatest effect on the degree of risk reduction?
26)
A)
The extent of statistical interdependency between the returns on different investments
B)
The number of securities in the portfolio
C)
The expected return on the constituent investments
D)
The total return on the investments
27)
Companies A and B show perfect negative correlation. What are the risks associated with investing
in the two companies?
27)
A)
Infinite
B)
A minimum
C)
A maximum
D)
Zero, if weights are appropriately chosen
28)
What does the symbol Rirepresent in the formula used to calculate standard deviation?
28)
A)
Mean return
B)
Expected return for event i
C)
Probability of event i occurring
D)
Expected mean return
7
29)
How can you reduce the level of risk, provided the constituents of a portfolio are not perfectly
positively correlated?
29)
A)
Decrease the number of securities
B)
Make the statistical interdependence between the securities more positive
C)
Identify high profit investments
D)
Increase the number of securities
30)
How would you assess the risks associated with a portfolio of two companies that show perfect
positive correlation?
30)
A)
Assume that they were zero
B)
Calculate the difference between the two risks
C)
Calculate the sum of the two risks
D)
Calculate the average of the two risks
31)
Which of the following equations correctly shows the relation between the semi-annual rate (s) and
the annual rate (R)?
31)
A)
1 + s = 2(1 + R)
B)
(1 + s)2= 1 + R
C)
(1 + s)2= 1 + R
D)
2(1 + s) = 1 - R
32)
What term is used for the extent to which the returns on two investments move together?
32)
A)
Covariance
B)
Correlativity
C)
Correspondence
D)
Coefficient
8
33)
Which of the following could reduce the risk on a portfolio to zero?
33)
A)
Appropriate allocation of funds where there is perfectly negative correlation
B)
Any allocation of funds provided there is perfectly negative correlation.
C)
Appropriate allocation of funds where there is perfectly positive correlation
D)
Appropriate allocation of funds provided there is negative correlation.
34)
What does X represent in the formula X =n
i=1(Ri-Ri )2 pi ?
34)
A)
Standard deviation
B)
Sum of the expected returns
C)
Variance
D)
Expected return
9
Answer Key
Testname: C7
10
