Investment Management Exam Paper
Sample (Easy/Medium level of difficulty) Midterm Exam, FINE441- Fall 2012 – Answer KEYs are attached in the end! THIS IS THE EXAMPLE OF MULTIPLE CHOICE QUESTIONS. THE NUMERICAL PROBLEMS WILL BE SIMILAR (NOT IDENTICAL) TO THE END OF CHAPTER PROBLEMS POSTED ON My Courses and Assignments 1. You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $29. What was your holding period return? A) 45% B) 50% C) 5% D) 40% E) none of the above
Use the following to answer questions 2-3: You have been given this probability distribution for the holding period return for XYZ stock:
State of the Economy Boom Normal growth Recession
2.
Probability .30 .50 .20
HPR 18% 12% - 5%
What is the expected holding period return for XYZ stock?
3.
What is the expected standard deviation for XYZ stock?
4.
A T-bill pays 6 percent rate of return. Would risk-averse investors invest in a risky portfolio that pays 12 percent with a probability of 40 percent or 2 percent with a probability of 60 percent? A) Yes, because they are rewarded with a risk premium. B) No, because they are not rewarded with a risk premium. C) No, because the risk premium is small. D) Cannot be determined. E) None of the above
5. In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor? A) It is the locus of portfolios that have the same expected rates of return and different standard deviations. B) It is the locus of portfolios that have the same standard deviations and different rates of return. C) It is the locus of portfolios that offer the same utility according to returns and standard deviations. D) It connects portfolios that offer increasing utilities according to returns and standard deviations. E) none of the above. 6. Assume an investor with the following utility function: U = E(r) - 3/2(s2). To maximize her expected utility, she would choose the
Use the following to answer questions 2-3: You have been given this probability distribution for the holding period return for XYZ stock:
State of the Economy Boom Normal growth Recession
2.
Probability .30 .50 .20
HPR 18% 12% - 5%
What is the expected holding period return for XYZ stock?
3.
What is the expected standard deviation for XYZ stock?
4.
A T-bill pays 6 percent rate of return. Would risk-averse investors invest in a risky portfolio that pays 12 percent with a probability of 40 percent or 2 percent with a probability of 60 percent? A) Yes, because they are rewarded with a risk premium. B) No, because they are not rewarded with a risk premium. C) No, because the risk premium is small. D) Cannot be determined. E) None of the above
5. In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor? A) It is the locus of portfolios that have the same expected rates of return and different standard deviations. B) It is the locus of portfolios that have the same standard deviations and different rates of return. C) It is the locus of portfolios that offer the same utility according to returns and standard deviations. D) It connects portfolios that offer increasing utilities according to returns and standard deviations. E) none of the above. 6. Assume an investor with the following utility function: U = E(r) - 3/2(s2). To maximize her expected utility, she would choose the