Exam2 (please set your calculator decimal as 4):

1. A portfolio is composed of two stocks, A and B. tock A !as a standard de"iation of

return of 2#$ w!ile stock B !as a standard de"iation of return of #$. tock A
comprises 2%$ of t!e portfolio w!ile stock B comprises &%$ of t!e portfolio. 'f t!e
"ariance of return on t!e portfolio is .%%#%, w!at is t!e correlation coefficient (etween
t!e returns on A and B)
%.%%# * (%.2)+2(%.2#)+2,(%.&)+2(%.%#)+2,2-(%.2%)(%.&%)(%.2#)(%.%#)p
p*%.22# . ps
2. A portfolio is composed of two stocks, A and B. tock A !as a standard de"iation of
return of #$ w!ile stock B !as a standard de"iation of return of 1#$. /!e correlation
coefficient (etween t!e returns on A and B is .#. tock A comprises 4%$ of t!e
portfolio w!ile stock B comprises 0%$ of t!e portfolio. 1!at is t!e "ariance of return
on t!e portfolio)
2 * (.4%-%.%#)+2,(%.0%-%.1#)+2,2(%.4)(%.0)(%.%#)(%.1#)(%.#) * %.%1%3 * 1.%3$ . ps
3. An in"estor can desi4n a risky portfolio (ased on two stocks, A and B. /!e standard
de"iation of return on stock A is 2%$ w!ile t!e standard de"iation on stock B is 1#$.
/!e correlation coefficient (etween t!e return on A and B is %$. /!e expected return
on stock A is 2%$ w!ile on stock B it is 1%$. 1!at is t!e proportion of t!e minimum
"ariance portfolio t!at would (e in"ested in stock B)
1a * 2(5(2a,2() *1#+25(1#+2,2%+2) *%.30, 1( * 16%.30 * %.04 . ps
4. 7ou in"est 80%% in security A wit! a (eta of 1.# and 84%% in security B wit! a (eta of .
9%. 1!at is t!e (eta of t!is formed portfolio)
Bp * 1a-(a,1(-(( * .0-1.#,.4-.9 * 1.20 . ps
#. ecurity A !as an expected rate of return of 12$ and a (eta of 1.1%. /!e market
expected rate of return is &$ and t!e risk6free rate is #$. 1!at is t!e alp!a of t!e
stock)
.12 : ;%.%#,1.1-(.%&6.%#)< * %.%3. . ps
0. =onsider t!e one6factor A>/. /!e standard de"iation of return on a well6di"ersified
portfolio is 2%$. /!e standard de"iation on t!e factor portfolio is 12$. 1!at is t!e
approximately (eta of t!e well6di"ersified portfolio is)
%.2% * (-%.12 ( * 1.0. . ps
>a4e 1
.. 'f t!e simple =A>? is "alid, is t!e situations (elow possi(le) And w!y)( /!ere is no
point if you do not s!ow your work)


E x p e c t e d
> o r t f o l i o @ e t u r n B e t a
A 1 # $ 1 . 2
B 1 # $ 1 . %
AB, (ecause expected return is not a linear function of (eta. . ps
&. 'f t!e simple =A>? is "alid, is t!e situations (elow possi(le) And w!y)( /!ere is
no point if you do not s!ow your work)


E x p e c t e d
> o r t f o l i o @ e t u r n B e t a
A 2 # $ 1 . #
B # $ % . #
Ao, (ecause if =A>? is !eld t!en rf * 6#$. . ps
9. uppose t!at t!e risk6fee rate is .$ and a well6di"ersified portfolio, 2, wit! (eta of 1.3
!as an alp!a of 2$,and anot!er well6di"ersifies portfolio, C, wit! (eta of %.& !as an alp!a
of 1$. 's t!ere any ar(itra4e opportunity) Dow to construct ar(itra4e portfolio)
11B1,(1611)B2 * % 11 * 6(25((16(2) *6%.&5(1.36%.&) *61.0 12 *2.0 11 ps
Alp!a * 11-alp!a1,12-alp!a2 * 61.0-%.%2,2.0-%.%1*6%.0$
!ort risk6free portfolio and lon4 risk6free asset
1%. A coupon (ond w!ic! pays interest of 84% annually, !as a par "alue of 81,%%%, matures in
# years, and is sellin4 today at a 8&4%.29. 1!at is t!e yield to maturity on t!is (ond
(assumin4 semiannual payments))
>mt *2%, E2 * 1%%%, >2 * 6&4%.29 A*1% ' * 3.9.-2 * ..93$ . ps
11. A coupon (ond w!ic! pays interest of 8#% annually, !as a par "alue of 81,%%%, matures in
# years, and is sellin4 today at a 8&4#.2 discount from par "alue. 1!at is t!e current
yield on t!is (ond)
=7 * annual payments5 p% * #%5&4#.2% * #.92$ . ps
12. =onsider t!e followin4 81,%%% par "alue Fero6coupon (onds: . ps
>a4e 2
B o n d Y e a r s t o M a t u r i t y Y i e l d t o M a t u r i t y
A 1 0 . % % $
B 2 . . # % $
= 3 . . 9 9 $
G 4 & . 4 9 $
E # 1 % . . % $
1!at s!ould (e t!e expected one6year interest rate one year from now)
(1,%.%0)-(1,r12) * (1,%.%.#)+2 r12 * 9.%2$
13. 'f you (elie"e in t!e HHHHHHHHHH form of t!e E?D, you (elie"e t!at stock prices reflect
all pu(licly a"aila(le information (ut not information t!at is a"aila(le only to insiders.
A) semi6stron4
B) strong
=) weak
G) any of t!e a(o"e
14. /!e semi6stron4 form of t!e efficient market !ypot!esis contradicts HHHHHHHHHH.
A) tec!nical analysis, (ut supports fundamental analysis as "alid
B) fundamental analysis, (ut supports tec!nical analysis as "alid
C) both fundamental analysis and technical analysis
G) tec!nical analysis, (ut is silent on t!e possi(ility of successful fundamental analysis
1#. Accordin4 to t!e efficient market !ypot!esis, HHHHHHHHHH.
A) !i4! (eta stocks are consistently o"erpriced
B) low (eta stocks are consistently o"erpriced
C) negative alphas on stocks will quickly disappear
G) Aone of t!e a(o"e answers is correct

>a4e 3