1, Theoretically, it is impossible to construct a portfolio with zero variance from assets whose returns have positive variance individually, if the pair-wise correlation coefficients of these returns are greater than negative one.

True

False

2, What is ABC portfolio's beta if 25% of the funds are invested in the market portfolio, 50% in an asset with twice as much risk as the market portfolio, and the remainder in a risk-free asset?

1.25

0.25

0.50

0.75

1.00

3, Which of the following is true?

• There is a reward for bearing idosyncratic risk, on average.
• If a market is efficient, all assets in that market will have the same reward to risk ratio.
• On average, the greater the risk, the lower the reward.
• When comparing the common stock of two firms, the riskier one will have the lower price.
• Risky assets on average do not earn a risk premium.

4, The ABC Co.'s stock prices are $50, $60, $75, $90, and $99 over the past five years, respectively. Its dividends over the same periods are $1, $1.7, $1.8, and $2 respectively. What is the arithmetic mean of the capital gains yield over these years?

• 2.36%
• 20.96%
• 10%
• 28.99%
• 18.75%

5, Assume you are looking at a graph depicting the security market line in an efficient market. A stock which is miss-priced may not plot on that graph:

• above the security market line.
• on the security market line.
• to the left of the overall market.
• to the right of the overall market.
• below the security market line.

6, The ABC Co.'s stock has annual expected return of 0.195, variance of 0.221. Based on this information, what is the 95 percent probability range of returns for any one given year?

• -74.5% to 113.5%
• -91.0% to 85.8%
• -2.6% to 41.6%
• -27.5% to 66.5%
• -24.7% to 63.7%

7, Which one of the following types of investments would be associated with the narrowest bell curve?

• Small-company stocks
• Long-term corporate bonds
• Large-company stocks
• Long-term government bonds
• Medium-company stocks

8, The ABC Co.'s flotation costs of equity and debt are 6.5% and 4.5%, respectively. If the company's weighted flotation cost is 5.38%, its D/E ratio is________.

• 14/11
• 11/14
• 14/25
• 2/3
• 25/14

9, The ABC Portfolio has the following information. What is the expected return of the portfolio if 20% of the portfolio funds is invested stock A, 30% in B, and rest in stock C?

Return Return on on stock stock Returns State Probability on stock A B C Boom Bust