1. An investor plans to invest 75 percent of her funds in the common stock of Mickey Company and 25 percent in Mini Company. The expected return on Mickey is 16 percent and the expected return on Mini is 12 percent. The standard deviation of returns for Mickey is 20 percent and for Mini is 15 percent. The correlation between the returns for Mickey and Mini is -0.4 (negative 0.4). Determine the standard deviation of returns for this investor's portfolio.

a, 15.63% b. 11.33% c. 21.76% d. 13.93%

2. Seattle Best Company common stock is currently selling for $40 per share. Security analysts at Goldman Sachs have assigned the following probability distribution to the price of (and rate of return on) Seattle Best stock one year from now: Price Rate of Return Probability $35 -12.5% 0.55 $45 12.5% 0.30 $55 +37.5% 0.13 $65 +62.5% 0.02 Assuming that Seattle Best is not expected to pay any dividends during the coming year, determine the expected rate of return on Seattle Best Stock.

a. 30.00% b. -6.25% c. 3.00% d. 10.05%

3. Cranberry Industries, Inc. is in the process of determining its optimal capital budget for next year. The following investment projects are under consideration: Required Expected Rate Project Investment of Return A $5 million 18.0% B 5 million 15.0% C 2 million 14.5% D 2 million 14.0% E 6 million 13.5% F 3 million 13.0% G 5 million 12.5% The firm's marginal cost of capital schedule is as follows: Amount of Funds Raised Cost $0 - $5 million 12.0% $5 million - $10 million 12.5% $10 million - $18 million 13.5% Over $18 million 15.0% Determine Cranberry's optimal capital budget (in dollars) for the coming year.

a. $14 million b. $17 million c. $20 million d. $28 million

4. Which of the following is/are TRUE? I. The systematic (market) risk is diversifiable, and the unsystematic risk is non-diversifiable. II. The efficient portfolios provide the highest possible return for a given level of risk (i.e., for a given standard deviation). III. With the ability to borrow and lend at the risk-free rate, there is one BEST efficient risky portfolio to hold, the tangency portfolio (identified by the tangent point of the capital market line and the efficient frontier).

a. I only b. II only c. III only d. I and III e. II and III

5. Which of the following is/are TRUE? I. The security market line can be thought of as expressing relationships between expected required rates of return and beta. II. The beta of the market portfolio is 0. III. A stock with a beta of zero would be expected to have a rate of return equal to zero. IV. On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by borrowing money at risk-free rate and investing the borrowed amount at the tangency portfolio, m (i.e., market portfolio).

a. I and IV b. I, II and IV c. I, III and IV d. I, II and III e. II and IV