1. Two investment advisors are comparing performance. Advisor A averaged a 15% return with a portfolio beta of 1.5, and advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which advisor was the better stock picker?

A. Advisor A was better because he generated a larger alpha.

B. Advisor B was better because she generated a larger alpha.

C. Advisor A was better because he generated a higher return.

D. Advisor B was better because she achieved a good return with a lower beta.

-----------

2. If an investor can hold a portfolio of almost infinite number of assets, is there a certain type of risk of the portfolio that matters the most to the investor (assuming all the assets are equal-

weighted in the portfolio)

A. Average volatility of each asset

B. Covariance between assets

C. Both volatility of each asset and the covariance between assets are equally important

D. The relative importance of volatility and covariance risks depends on the average return of each asset.

-------

3. How do you construct a risk-free portfolio using two assets?

A. Find two assets with correlation between them bigger than 0 but smaller than 1

B. Find two assets with correlation between them bigger than -1 but smaller than 0

C. Find two assets with correlation between them equal to -1

D. Find two assets with correlation between them equal to 1

----

4. If investors think the returns stock market delivered were not good enough in recent years, they decide to sell stocks. The selling causes stock price to fall now, thereby causing the stock market and going forward

A. Expected returns to fall; expected future risk premiums to fall

B. expected returns to rise; risk premiums to fall

C. expected returns to rise; risk premiums to rise

D. expected returns to fall; risk premiums to rise