1a. Which of the following is TRUE about the Yale endowed fund?

I It has a higher percentage of liquid assets than a typical endowed fund. II It offers higher returns than a typical endowed fund in the long run.

a. I and II

b. II only

c. Neither I nor II

d. I only

1b. Joe Johnson is a portfolio manager for a bank trust department. Johnson meets with a clients, David Murray, to review his investment objectives. Murray currently holds well-diversified portfolios of risky assets. He wants to increase the expected return of his portfolio based on the Capital Market Line (CML). What action should Johnson take to achieve Murrays objective?

a. Johnson should substitute high beta stocks for low beta stocks in order to increase the overall beta of Murrays portfolio

b. Johnson sell Murrays existing portfolio and buy risk-free assets

c. Johnson should borrow funds and invest those funds proportionately in Murrays existing portfolio.

d. Johnson should substitute low beta stocks for high beta stocks in order to reduce the overall beta of Murrays portfolio.

1c. Assume that the expected market return is 14%, a stock has beta of 1.2, and the T-bill rate is 6%.

If you expect (or based on your own forecast) that the stock will offer you a return of 16.8%, you would _____________ the stock.

[ consider the SML]

a. sell

b. buy

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