1. Risk of two securities with different expected return can be compared with:

a) Coefficient of variation

b) Standard deviation of securities

c) Variance of Securities

d) None of the above

2. A portfolio having two risky securities can be turned risk less if

a) The securities are completely positively correlated

b) If the correlation ranges between zero and one

c) The securities are completely negatively correlated

d) None of the above.

3. Efficient frontier comprises of

a) Portfolios that have negatively correlated securities

b) Portfolios that have positively correlated securities

c) Inefficient portfolios

d) Efficient portfolios

4. Efficient portfolios can be defined as those portfolios which for a given level of risk provides

a) Maximum return

b) Average return

c) Minimum return

d) None of the above

5. The point of tangency between risk return indifferences curves and efficient frontier highlights:

a) Optimal portfolio

b) Efficient portfolio

c) Sub-optimal portfolio

d) None of the above

6. A portfolio comprises two securities and the expected return on them is 12% and 16% respectively. Determine return of portfolio if first security constitutes 40% of total portfolio.

a) 12.4%

b) 13.4%

c) 14.4%

d) 15.4%

7. This type of risk is avoidable through proper diversification.

a) portfolio risk

b) systematic risk

c) unsystematic risk

d) total risk

8. Which statement is true regarding the market portfolio:

a) It lies on the efficient frontier.

b) All securities in the market portfolio are held in proportion to their market values.

c) It includes only common stock

d) a and b

9. The portfolio theory relies on the following variable(s)

a) risk

b) project return

c) both a and b

d) none of the above

10. The basic unit of analysis in capital budgeting is the ________.

a) financing project

b) investment project

c) strategic project

d) variable project

True or False. If it is false write the correct answer.

1.There is no benefit to diversification if there is unsystematic risks.

2. A recession is an economic event that is best characterized as Unsystematic risk that can be diversified away.

3. An underpriced security will plot below the security Market line.

4. Divirsifiablerisks include inflation shocks.

5. Perfect capital market is a market where all transactors are a pricetakers.

6. Preferences are expressed in transformation curve.

7. Value of the firm is the present value of the expected future cash flows.

8. A project would be undertaken if its net present value is zero.

9. Security Market Line describesa relationship between expected return and risk.

10. According to the Capital Asset Pricing Model(CAPM), everyone should hold the same portfolio.Short Questions

1. Explain five roles of financial system, and its role in development.

2. What are the reasons for financial deals specialization? Illustrate

with good examples.