Multiple choice

1.  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 correlation coefficient between the return of FC and MC.  

a. 0.0 

b. -0.655 

c. +0.655 

d. None of the above 

2.  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%. If FC and MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the portfolio.  

a. 12% 

b. 10% 

c. 11% 

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%.What is the variance of the portfolio with 50% of the funds invested in FC and 50% in MC (approximately)?  

a. 85.75 

b. 111.50 

c. 55.75 

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%. What is the standard deviation of the portfolio with 50% of the funds invested in FC and 50% in MC?  

a. 10.6% 

b. 14.4% 

c. 9.3% 

d. None of the above 

5. Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would:  

a. Prefer A to B 

b. Prefer B to A 

c. Prefer a portfolio of A and B 

d. Cannot answer without knowing investor's risk preferences 

6. Investments B and C both have the same standard deviation of 20%. If the expected return on B is 15% and that of C is 18%, then the investors would  

a. Prefer B to C 

b. Prefer C to B 

c. Reject both B and C 

d. None of the above 

7. The efficient portfolios: I) Have only unique risk II) Provide highest returns for a given level of risk III) Provide the least risk for a given level of returns IV) Have no risk at all  

a. I only 

b. II and III only 

c. IV only 

d. II only 

8. By combining lending and borrowing at the risk-free rate with the efficient portfolios, we can I) extend the range of investment possibilities II) change efficient set of portfolios from being curvilinear to a straight line III) provide a higher expected return for any level of risk except the tangential portfolio  

a. I only 

b. I and II only 

c. I, II, and III 

d. None of the above 

9. Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%; 

calculate the expected return on the resulting portfolio:  

a. 10% 

b. 4% 

c. 12% 

d. None of the above 

10. Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%; 

calculate the standard deviation of the returns on the resulting portfolio:  

a. 8% 

b. 10% 

c. 20% 

d. None of the above