Multiple choice

1. Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 16% and a standard deviation of returns of 20%. The risk-free asset has an interest rate of 4%; calculate the expected return on the resulting portfolio:  

a. 20% 

b. 32% 

c. 28% 

d. None of the above 

2. Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 20% and a standard deviation of returns of 16%. The risk-free asset has an interest rate of 4%; calculate standard deviation of the resulting portfolio:  

a. 28% 

b. 40% 

c. 32% 

d. None of the above 

3. If the covariance of Stock A with Stock B is -100, what is the covariance of Stock B with Stock A?  

a. +100 

b. -100 

c. 1/100 

d. Need additional information 

4. The correlation measures the:  

a. Rate of movements of the return of individual stocks 

b. Direction of movement of the return of individual stocks 

c. Direction of movement between the returns of two stocks 

d. Stock market volatility 

5. If the correlation coefficient between Stock A and Stock B is +0.6, what is the correlation between Stock B with Stock A?  

a. +0.6 

b. -0.6 

c. +0.4 

d. -0.4 

6. The correlation between the efficient portfolio and the risk-free asset is:  

a. +1 

b. -1 

c. 0 

d. Cannot be calculated 

7. In the presence of a risk-free asset, the investor's job is to: I) invest in the market portfolio II) find an interior portfolio using quadratic programming III) borrow or lend at the risk-free rate IV) read and understand Markowitz's portfolio theory  

a. I and II only 

b. I and III only 

c. II and IV only 

d. IV only 

8. Sharpe ratio is defined as:  

a. (rP - rf )/σP 

b. (rP - rM )/σP 

c. (rP - rf )/βP 

d. None of the above 

9. Beta of Treasury bills is:  

a. +1.0 

b. +0.5 

c. -1.0 

d. 0 

10. Beta of the market portfolio is:  

a. Zero 

b. +0.5 

c. -1.0 

d. +1.0