Multiple choice

1.  Portfolio Theory was first developed by:  

a. Merton Miller 

b. Richard Brealey 

c. Franco Modigliani 

d. Harry Markowitz 

2.  The distribution of returns, measured over a short interval of time, like daily returns, can be approximated by:  

a. Normal distribution 

b. Lognormal distribution 

c. Binomial distribution 

d. None of the above 

3.  Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the mean of returns for each company.  

a. FC: 12% MC: 6% 

b. FC: 10%, MC: 12% 

c. FC: 20%, MC: 32% 

d. None of the above 

4.  Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the variances of return for FC and MC. 

a. FC: 100 MC: 256 

b. FC: 350 MC: 96 

c. FC: 175 MC: 48 

d. None of the above 

5.  Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the covariance between the returns of FC and MC.  

a. 60 

b. 80 

c. 40 

d. None of the above 

6.  Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the standard deviation (S.D.) of return for FC and MC.  

a. FC: 10% MC: 12% 

b. FC: 18.7% MC: 9.8% 

c. FC: 13.2% MC: 6.9% 

d. None of the above 

7. The correlation coefficient between stock A and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Calculate the beta of the stock.  

a. 1.1 

b. 1.0 

c. 0.9 

d. 0.6 

8. Historical nominal return for stock A is -8%, +10% and +22%. The nominal return for the market portfolio is +6%, +18% and 24%. Calculate the beta for stock A.  

a. 1.64 

b. 0.61 

c. 1.0 

d. None of the above 

9. The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual returns for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for the stock.  

a. 0.74 

b. 1.36 

c. 1.0 

d. None of the above 

10. The correlation coefficient between stock B and the market portfolio is 0.8. The standard deviation of the stock B is 35% and that of the market is 20%. Calculate the beta of the stock.  

a. 1.0 

b. 1.4 

c. 0.8 

d. 0.7