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Finance Midterm Paper

CAL than the market. This is not possible since the CAMP says that the market portfolio is efficient. Multiple Choice Questions: (1 5 points) 1. Asset A has an expected return of 15% and a reward-to-variability ratio of . 4. Asset B has an expected return of and a reward-to-variability ratio of . 3. A risk- averse investor would prefer a portfolio using the risk-free asset and A) asset A B) asset B C) no risky asset D) can’t tell from the data given A) Asset A 2.

An investor’s degree of risk aversion will determine his A) optimal risky portfolio B) risk-free rate C) mix of risk-free asset and optimal risky asset D) choice of risk free asset C) Mix of risk-free asset and optimal risky asset 3. The optimal risky portfolio can be identified by finding A) the minimum variance point on the efficient frontier B) the maximum return point on the efficient frontier C) the tangency point of the capital allocation line and the efficient frontier D) None of the above answers is correct C) The tangency point of the capital allocation line and the efficient frontier .

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You have a $50,000 portfolio consisting of Intel, GE, and Condensed. You put $20,000 in Intel, $12,000 in GE, and the rest in Condensed. Intel, GE, and Condensed have betas of 1. 3, 1. 0, and 0. 8, respectively. What is your portfolio beta? A) 1. 048 B) 1. 033 C) 1. 000 D) 1. 037 5. In a simple CAMP world, which of the following statements is/are correct? I. All investors will choose to hold the market portfolio, which includes all risky assets aversion. Ill. The return per unit of risk will be identical for all individual assets.

IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. L, II, and Ill only A) II, Ill, and IV only B) l, Ill, and IV only C) D) I, II, Ill, and IV D) l, II, Ill, and IV Conceptual Question (7 points) Please choose one of the following short-answer questions and respond to it in a few sentences. Your answer will be graded on the basis of accuracy, completeness, and conciseness. Question 1 What is the separation property of the efficient diversification process?

The separation property, identified by James Dobbin, implies that an individual’s choice f a complete portfolio can be broken down into two distinct steps: first, determine the optimal risky portfolio O on the efficient frontier. Second, choose a mix between O and the risk-free asset that is best for the individual level of risk aversion. Question 2 Define systematic and firm specific risk. Give two examples of each type of risk. How is systematic risk measured? Examples include uncertainty about the inflation rate or the risk of currency fluctuations. Firm-specific risk is risk that is particular to one firm and can be diversified away.

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