Sample Final Questions Investment Analysis Total exam time: 2 hours
Answer the next two questions with regard to this information: Asset Expected return SD x 10 5 Y 5 5 The covariance between the two assets is 20%2
1. What is the variance of a portfolio which is 25% in X and 75% in Y?
(a) 20%2 (b) 23.125%2 (c) 40%2 (d) 50.13%2
2. If you had to hold one of the following four portfolios, which would you rather hold?
X by itself, Y by itself, 25% in X and 75% in Y, 75% in X and 25% in Y
(a) Definitely X by itself
(b) Definitely Y by itself
(c) Definitely 25% in X and 75% in Y (d) Definitely 75% in X and 25% in Y (e) Either 25% in X and 75% in Y, or 75% in X and 25% in Y (f) Either 25% in X and 75% in Y,or Y by itself (g) Either 75% in X and 25% in Y,or X by itself
3. I have $5000 to invest. I invest the whole amount. I buy $10,000 of IBM, and go short $3000 of AMZN. I borrow whatever I need to at the risk free rate of 5% per month effective. If, over the following month, IBM made 10% and AMZN made 3%, how much did I have when I closed out my positions at the end of the month?
(a) 4350 (b) 5500 (c) 5810 (d) 5950
4. Assets A, B, X, and Y have the same SD of returns of 10%. The correlation between the returns on asset A and asset B is 0.75. The correlation between the returns on X and Y is 0.1. Which of the following portfolios has the lowest variance?
(a) Half in A,half in B (b) Half in X,half in Y (c) All in A (d) All in X
5. GE has assets whose value in its books is $120 B. It has bonds which are valued by GE in its books at $50 B, but which are valued at $45 B in the marketplace.
As part of your Accounting for MBAs course, you investigate the value of GE's assets. and you conclude that they are worth $90 B. GE currently has 1B shares outstanding and each share is trading at $50. GE stock is:
(a) Overpriced (b) Underpriced
6. A hedge fund manager cares about expected return and variance of her portfolio. She holds a large portfolio which looks like the market portfolio. She has the following information about two stocks: Expected return SD Covariance with the market portfolio x 5% 15% 20%2 Y 5% 10% 22%2 She wants to add a small amount of one of these stocks to her portfolio. Which should she add?
(a) X (b) Y (c) We can't pick for her: her choice depends on her risk preferences (d) She needs more information to choose
2
Answer the next four questions with regard to this information. You have access to tw