Music and Cidne

NAME: _________________________ (10 POINTS)

FINAL EXAM – ANSWER KEY

Fall 2011 – Professor Elton

Multiple Choice (15 POINTS)

1. Diversification among assets improves the opportunities faced by all risk-averse investors

a. irrespective of the correlation coefficients

b. only if correlations are not larger than 0

c. only if the assets have similar variances

d. for assets with relatively large variances

e. none of the above

If correlation is +1 diversification does not improve opportunities

1B. Which statement is true?

a. An efficient portfolio always provides the highest expected rate of return.

b. An efficient portfolio has less risk than any other asset or portfolio with

comparable expected return and more return than any other asset or

portfolio with comparable risk.

c. Neither one of the above statements is true.

1C. The CAPM implies that

a. investors may invest in assets with expected returns lower than the riskless

interest rate.

b. no investor should invest in the risk-free asset.

c. the only relevant measure of risk is standard deviation.

d. the expected return on an efficient portfolio may be lower than the

riskless interest rate.

If beta is less than zero, an asset returning less than riskless rate can have an equilibrium return below riskless rate.

1D. Assume that the risk-free rate is 9% and that the market portfolio has an expected

return of 17% and a standard deviation of 20%. Under equilibrium conditions as

described by the CAPM, what would be the expected return for a portfolio having

no diversifiable risk and a standard deviation of 15%?

a. 17%

b. 9%

c. 20%

d. 15%

If the portfolio has no diversifiable risk, then it’s all systematic and its beta is 15/20 or .75, thus:

9 + .75(17-9) = 15%

1E. If the...