NOTE: This sample test should only be used as a guide to the styles of questions. The topics covered here are not exhaustive. Your revision should not be based on these set of questions only. The level of difficulty of this sample test is also NOT indicative of the level of difficulty of the actual test. The answers are provided at the end of the document.
1. A reasonable estimate of the annual standard deviation of return of the stock market would be? a. Less than 5 percent. b. Between 5 and 10 percent. c. Between 15 and 25 percent d. More than 30 percent e. Impossible to estimate 2. A project has an expected cash flow of $200, in year 1. The risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for year 1. a. $175.21 b. $164.29 c. $228.30 d. $212.56 e. None of the above 3. Share X has a standard deviation of return of 10%, share Y has a standard deviation of return of 20%. The correlation coefficient between the shares is 0.5. If you invest 60% of your funds in share X and 40% in share Y, what is the standard deviation of the portfolio? a. 10% b. 20% c. 12.2% d. 14.0% e. None of the above 4. Richard Rolls critique of tests of the capital asset pricing model is that: a. Given an efficient market portfolio the CAPM is tautology b. The market portfolio is not efficient c. You need to test the model using the market portfolio for all capital assets d. a and c e. a and b 5. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. If it undertakes a new project with the same risk profile, what is the project beta (assuming zero tax rate)? a. 0.70 b. 0.72 c. 0.96 d. 1.04
6. Consider following data on three shares: Share Standard Deviation A 0.16 B 0.30 C 0.20 Beta 1.00 0.80 1.29
Assuming that you wished to minimise risk, you would select share if the share was held in on its own, and you would select share if the share was to be added to a portfolio. a b c d e 7. A, A A, B B, A B, C C, A
In a portfolio of three different shares, which of the following is NOT possible? a. b. c. d. e. The risk of the portfolio is less than the risk of each of the shares held in isolation. The risk of the portfolio is greater than the risk of one of the shares. The beta of the portfolio is less than the beta of each of the individual shares. The beta of the portfolio is greater than the beta of one of the individual share's betas. The standard deviation of the portfolio is greater than the standard deviation of the risk free asset.
You hold a diversified portfolio consisting of 20 different shares with $1,000 invested in each. The portfolio beta is equal to 1.35. You have decided to sell all your holding of Edna Average Cosmetics Ltd which has a beta of 1. You will reinvest the proceeds in Aggressive Action Ltd which has a beta of 2. What is the new beta of the portfolio? a. b. c. d. e. 1.35 2.35 1.45 1.10 1.40
9. A company is considering an investment in a new project. That project is best evaluated as though: a. b. c. d. e. It is a stand alone project independent of the company and so its risk is measured as variance. Its risk is adjusted to allow for diversification with the companies existing projects Its cost of capital is the weighted average cost of capital Its risk is evaluated as though it were traded in the capital markets None of the above
10 Is the portfolio with the minimum possible variance an efficient portfolio?
a. b. c. d. e.
Yes No Yes, but only for risk loving investors Yes, but only for investors who will not take any risk. Yes, but only for investors who are risk neutral.
11. For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks is: A) +1 B) 0 C) -0.5 D) -1 E) None of the above 12. The variance or standard deviation is a measure of: A) Total risk B) Unique risk C)...
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