Ch.6 Quiz

Instructions
Please read the questions carefully.

This assessment is worth 100 points.

  1. The _______ caused a very high spread between 3-month CDs and T-bills.    (4 points)

    a.  
    b.  
    c.  
    d.  

  2. The return on an asset over a period between portfolio revisions is called __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  3. The geometric average of 10%, 20% and 25% is __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  4. Suppose you pay $9,700 for a Treasury bill maturing in three months. What is the holding period return for this investment?    (4 points)

    a.  
    b.  
    c.  
    d.  

  5. Suppose you pay $9,700 for a Treasury bill maturing in six months. What is the effective annual rate of return for this investment?    (4 points)

    a.  
    b.  
    c.  
    d.  

  6. A scenario analysis provides __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  7. The market risk premium is defined as ___________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  8. The reward/variability ratio is given by __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  9. The capital allocation line is also the __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  10. Historical records regarding returns on stocks, Treasury bonds, and Treasury bills between 1926 and 1998 show that __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  11. During the 1926 to 1998 period, the geometric mean return on small firm stocks was __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  12. During the 1926 to 1998 period, the standard deviation of returns on large firm stocks was __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  13. If you are promised a nominal return of 12%, on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?    (4 points)

    a.  
    b.  
    c.  
    d.  

  14. If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with?    (4 points)

    a.  
    b.  
    c.  
    d.  

  15. __________ is a true statement.    (4 points)

    a.  
    b.  
    c.  
    d.  

  16. A Treasury bill pays a 6% rate of return. A risk averse investor __________ invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  17. __________ is a true statement regarding risk averse investors.    (4 points)

    a.  
    b.  
    c.  
    d.  

  18. A treasury bill pays 5%. __________ would definitely not be chosen by a risk averse investor.    (4 points)

    a.  
    b.  
    c.  
    d.  

  19. The holding period return on a stock was 25%. Its ending price was $18 and its beginning price was $16. Its cash dividend must have been __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  20. Consider the following two investment alternatives. First, a risky portfolio that pays 20% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  21. You invest $100 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 12% and a standard deviation of 15% and a treasury bill with a rate of return of 5%. __________ of your money should be invested in the risky asset to form a portfolio with an expected rate of return of 9%    (4 points)

    a.  
    b.  
    c.  
    d.  

  22. The slope of the capital allocation line formed with the risky asset and the risk-free asset is __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  23. You have $500,000 available to invest. The risk-free rate as well as your borrowing rate is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  24. The return on the risky portfolio is 15%. The risk-free rate as well as the investor's borrowing rate is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  25. Use the following to answer questions 54-57:

    You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of treasury bills that pay 5% and a risky portfolio, P, constructed with 2 risky securities X and Y. The weight of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14% and Y has an expected rate of return of 10%.

    To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in treasury bills.    (4 points)

    a.  
    b.  
    c.  
    d.  



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