41) You are graphing the investment opportunity set for a portfolio of two securities with the
expected return on the vertical axis and the standard deviation on the horizontal axis. If the
correlation coefficient of the two securities is +1, the opportunity set will appear as which one of
the following shapes?
A) conical shape
B) linear with an upward slope
C) combination of two straight lines
D) hyperbole
E) horizontal line
42) A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of
the following characteristics? Assume the portfolios are comprised of five individual securities.
A) the lowest return for any given level of risk
B) the largest number of potential portfolios that can achieve a specific rate of return
C) the largest number of potential portfolios that can achieve a specific level of risk
D) a positive rate of return and a zero standard deviation
E) the lowest risk for any given rate of return
43) You combine a set of assets using different weights such that you produce the following
results.
Portfolio
Expected return
Standard deviation
A
9
%
11
%
B
14
16
C
12
13
D
7
8
E
11
14
Which one of these portfolios CANNOT be a Markowitz efficient portfolio?
A) A
B) B
C) C
D) D
E) E
44) What is the expected return on this stock given the following information?
State of the Economy
Probability
E(R)
Boom
0.4
14
%
Recession
0.6
-18
%
A) -8.07 percent
B) -7.69 percent
C) -6.80 percent
D) -5.70 percent
E) -5.20 percent
45) What is the expected return on this stock given the following information?
State of the Economy
Probability of
State of
Economy
Rate of Return if state occurs
Boom
0.05
16
%
Normal
0.45
7
%
Recession
0.50
-12
%
A) -2.05 percent
B) -1.08 percent
C) 0.47 percent
D) 1.22 percent
E) 1.43 percent
46) What is the expected return on this stock given the following information?
State of the Economy
Probability
E(R)
Boom
0.25
20
%
Normal
0.55
15
%
Recession
0.20
-12
%
A) 9.36 percent
B) 9.74 percent
C) 10.85 percent
D) 11.78 percent
E) 12.05 percent
47) An investor owns a security that is expected to return 10 percent in a booming economy and
3 percent in a normal economy. The overall expected return on the security is 5.45 percent.
Given there are only two states of the economy, what is the probability that the economy will
boom?
A) 28 percent
B) 33 percent
C) 35 percent
D) 41 percent
E) 45 percent
48) Rosita owns a stock with an overall expected return of 14.40 percent. The economy is
expected to either boom or be normal. There is a 52 percent chance the economy will boom. If
the economy booms, this stock is expected to return 15 percent. What is the expected return on
the stock if the economy is normal?
A) 12.00 percent
B) 12.83 percent
C) 13.15 percent
D) 13.75 percent
E) 14.40 percent
49) What is the expected return on this stock given the following information?
State of the Economy
Probability of
State of
Economy
Rate of Return if State Occurs
Boom
0.15
22
%
Normal
0.60
11
%
Recession
0.25
-14
%
A) 6.40 percent
B) 6.57 percent
C) 8.99 percent
D) 13.40 percent
E) 14.25 percent
50) The risk-free rate is 3.5 percent. What is the expected risk premium on this security given the
following information?
State of the Economy
Probability
E(R)
Boom
0.30
15
%
Normal
0.55
8
%
Recession
0.20
-11
%
A) 2.09 percent
B) 3.01 percent
C) 3.20 percent
D) 3.87 percent
E) 4.15 percent
51) The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the
following information?
State of the Economy
Probability of
State of
Economy
Rate of Return if State Occurs
Boom
0.35
0.14
Normal
0.65
0.08
A) 5.88 percent
B) 5.95 percent
C) 6.10 percent
D) 6.23 percent
E) 6.27 percent
52) The risk-free rate is 4.20 percent. What is the expected risk premium on this stock given the
following information?
State of the Economy
Probability of
State of
Economy
Rate of Return if State Occurs
Boom
0.28
23
%
Normal
0.72
11
%
A) 5.85 percent
B) 6.59 percent
C) 8.22 percent
D) 10.16 percent
E) 11.21 percent
53) There is a 35 percent probability that a particular stock will earn a 16 percent return and a 65
percent probability that it will earn 10 percent. What is the risk-free rate if the risk premium on
the stock is 7.5 percent?
A) 4.20 percent
B) 4.60 percent
C) 5.20 percent
D) 5.40 percent
E) 5.80 percent
54) Tall Stand Timber stock has an expected return of 16.8 percent. What is the risk-free rate if
the risk premium on the stock is 12.1 percent?
A) 4.70 percent
B) 5.30 percent
C) 5.67 percent
D) 6.55 percent
E) 7.17 percent
55) What is the variance of the expected returns on this stock?
State of the Economy
Probability of
State of
Economy
Rate of Return if State Occurs
Boom
0.40
15
%
Normal
0.60
19
%
A) 1.21
B) 1.42
C) 1.56
D) 3.84
E) 4.03
56) What is the variance of the expected returns on this stock?
State of the Economy
Probability
E(R)
Boom
0.25
21.00
Normal
0.75
11.00
A) 18.75
B) 35.49
C) 61.53
D) 78.97
E) 80.03
57) What is the variance of the returns on a security given the following information?
State of the Economy
Probability of
State of
Economy
Rate of Return if State Occurs
Boom
0.05
27
%
Normal
0.30
15
%
Recession
0.65
-22
%
A) 239.77
B) 284.05
C) 321.16
D) 347.15
E) 362.98
58) What is the variance of the returns on a security given the following information?
State of the Economy
Probability
E(R)
Boom
0.25
16
%
Normal
0.45
10
%
Recession
0.30
-8
%
A) 48.18
B) 56.23
C) 64.38
D) 72.87
E) 91.35
59) What is the standard deviation of the returns on this stock?
State of the Economy
Probability
E(R)
Boom
0.30
7.5
%
Normal
0.70
21.0
%
A) 3.33 percent
B) 4.62 percent
C) 5.01 percent
D) 5.77 percent
E) 6.19 percent
60) What is the standard deviation of the returns on this stock?
State of the Economy
Probability
E(R)
Boom
0.22
24
%
Normal
0.66
12
%
Recession
0.12
-60
%
A) 223.94 percent
B) 24.08 percent
C) 24.17 percent
D) 25.72 percent
E) 26.90 percent
61) What is the standard deviation of a security which has the following expected returns?
State of the Economy
Probability of
State of Economy
Rate of Return if State Occurs
Boom
0.10
19
%
Normal
0.75
13
%
Recession
0.15
-7
%
A) 7.48 percent
B) 7.61 percent
C) 7.67 percent
D) 7.82 percent
E) 7.91 percent
62) A portfolio consists of the following securities. What is the portfolio weight of stock C?
Stock
#Shares
PPS
A
200
$
48
B
150
$
33
C
350
$
21
A) 0.336
B) 0.389
C) 0.445
D) 0.451
E) 0.557
63) A portfolio consists of the following securities. What is the portfolio weight of stock X?
Stock
Number of
Shares
Price per Share
X
600
$
17
Y
900
$
23
Z
400
$
49
A) 0.183
B) 0.202
C) 0.219
D) 0.246
E) 0.285
64) Travis has a portfolio consisting of two stocks, A and B, which is valued at $53,800. Stock A
is worth $23,900. What is the portfolio weight of stock B?
A) 0.528
B) 0.543
C) 0.549
D) 0.551
E) 0.556
65) Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $95,300. Stock X
is worth $65,700. What is the portfolio weight of stock Y?
A) 0.351
B) 0.390
C) 0.408
D) 0.610
E) 0.649
66) You have a portfolio which is comprised of 60 percent of stock A and 40 percent of stock B.
What is the expected rate of return on this portfolio?
State
Prob
A
B
Boom
0.20
15
%
9
%
Normal
0.80
8
%
20
%
A) 12.76 percent
B) 12.88 percent
C) 13.44 percent
D) 13.56 percent
E) 13.85 percent