The document presents information about asset returns, variances, and covariances and asks 14 multiple choice questions related to portfolio theory calculations including the tangency portfolio, efficient frontier, CAPM, betas, and violations of the single-factor model assumptions.
The document presents information about asset returns, variances, and covariances and asks 14 multiple choice questions related to portfolio theory calculations including the tangency portfolio, efficient frontier, CAPM, betas, and violations of the single-factor model assumptions.
The document presents information about asset returns, variances, and covariances and asks 14 multiple choice questions related to portfolio theory calculations including the tangency portfolio, efficient frontier, CAPM, betas, and violations of the single-factor model assumptions.
The document presents information about asset returns, variances, and covariances and asks 14 multiple choice questions related to portfolio theory calculations including the tangency portfolio, efficient frontier, CAPM, betas, and violations of the single-factor model assumptions.
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Questions 1-6 refer to the following information
Consider an asset universe containing only two risky securities and a risk-free security paying rF = 2%. The two risky securities are characterised by the following expected return and variance covariance matrix:
= 0.10 and = 0.10 0.00
0.20 0.00 0.25
Answer the following questions:
1. The value of the scalars A, B and C are closest to:
(a). A = 116, B = 13.2, and C = 1.640.
(b). A = 14.0, B = 1.80, and C = 0.260. (c). A = 5.16, B = 0.72, and C = 0.110. (d). A = 0.35, B = 0.06, and C = 0.011.
2. The expected return of the tangency portfolio is closest to:
5. If borrowing (i.e., short selling the risk-free asset) was not allowed, the weights of the efficient portfolio with 20% expected return would be closest to:
(a). (0.00, 1.00)T
(b). (0.50, 0.50)T (c). (1.00, 0.00)T (d). (1.00, 0.56)T 6. All else being equal, if the risk-free rate increased, the return of the tangency portfolio would most likely:
(a). decrease. (b). increase. (c). stay the same. (d). undetermined.
Questions 7-10 refer to the following information
Asset Expected Return Standard Deviation Beta Residual Variance
Furthermore it is known that the four assets are correctly priced according to the CAPM with unlimited borrowing and lending (at the same rate).
Answer the following questions:
7. The standard deviation of Asset 1 is closest to:
(a). 1.044. (b). 0.889. (c). 0.762. (d). 0.580.
8. The standard deviation of Asset 2 is closest to:
(a). 0.60. (b). 0.36. (c). 0.13. (d). 0.00.
9. The expected return of Asset 3 is closest to:
(a). 0.130. (b). 0.115. (c). 0.090. (d). 0.065.
10. The beta of Asset 4 is closest to:
(a). 1.23. (b). 0.89. (c). 0.75. (d). 0.33. Questions 11-14 refer to the following information
Consider the following variance-covariance matrix:
= 0.02 0.01 0.03
0.01 0.01 0.01 0.03 0.01 0.05
where the portfolio in position one is identified as the market portfolio M and those in positions two and three are denoted portfolios A and B, respectively.
Answer the following questions:
11. The beta values for portfolio A and B are closest to:
(a). A = 2.00 and b = 0.67.
(b). A = 0.71 and b = 1.22. (c). A = 0.50 and b = 1.50. (d). A = 0.07 and b = 0.21.
12. The correlation coefficient between A and B is closest to:
(a). 0.707. (b). 0.447. (c). 0.316. (d). 0.010.
13. Assuming the single-factor model, the estimate for the covariance between A and B is closest to:
(a). 0.447. (b). 0.106. (c). 0.015. (d). 0.011.
14. Which of the following assumptions of the single factor model (SFM) is most likely violated when additional factors strongly influence all stocks in your analysis?
