FIN3702A MOCK MIDTERM TEST QUESTIONS

1. Consider that the CAPM applies. Portfolio A has a beta of 1.2 and an expected return
of 10%. Portfolio B has a beta of 0.8 and an expected return of 8%. To take advantage
of an arbitrage opportunity, you take a long position in Portfolio A and a short position
in Portfolio B. What can the risk-free rate be for this arbitrage strategy to make sense?

A. More than 4%
B. Between 3% and 4%
C. Between 2% and 3%
D. Between 1% and 2%
E. Less than 1%.

2. You purchase 200 Hamilton stock from your broker using as little of your own
money as possible. The initial margin is 40%. The price of the stock can fall by 20%
before you receive a margin call. What is the maintenance margin?

Note: Answer in percentages with two decimals. For example, if you find the answer
to be 10.526%, submit 10.53.

3. You purchased shares of a mutual fund at the beginning of the year. If the securities
in which the fund invested increased in value by 9% during the year, the fund's
management fee was 1.75% and your net return if you sold the fund at the end of the
year was 3.5%, what was the front-end load of this fund?

Note: Answer in percentages with two decimals. For example, if you find the answer
to be 10.526%, submit 10.53.

4. You are provided with the following data on the performance of Axe Fund:
Axe Fund
Expected Return 18%
Standard Deviation of Returns 39%
Residual standard deviation 15%
The risk-free return during the period was 3%.
The standard deviation on the returns for the Market Portfolio was 24%.

Assuming the Single Index Model holds, what is the Treynor measure for Axe Fund?

Note: Answer with two decimals. For example, if you find the answer to be 10.526,
submit 10.53.
5. Mr. Teo has the utility function of U = E(r) – 2σ2, where E(r) is the expected return
and σ is the standard deviation. Below are the assets Mr. Teo can invest in.
Asset Expected Return Standard Deviation
Risk-free Rate (Lending) 1% 0
Risk-Free Rate (Borrowing) 3% 0
Portfolio P 20% 40%
Portfolio Q 9% 20%
Correlation coefficient of Portfolio P and Portfolio Q is 0.5.
What is the expected return of the optimal complete portfolio for Mr. Teo?
(Round working steps to 4 decimal places)

Note: Answer in percentages with two decimals. For example, if you find the answer
to be 10.526%, submit 10.53.

6. You invest $100 in a risky portfolio K with an expected rate of return of 11% and a
standard deviation of 21% and a risk-free asset F with a rate of return of 4.5%.
What percentages of your money must be invested in the risk-free asset F and the
risky portfolio K, respectively, to form a portfolio with a standard deviation of 8%?

A. 30.1% and 69.9%

B. 50.5% and 49.5%
C. 61.9% and 38.1%
D. 73.6% and 26.4%
E. Cannot be determined.

7. You sold short 400 shares of common stock. The initial margin is 50%. By how much
must the stock price increase to result in a margin call if the maintenance margin is
25%?

Note: Answer in percentages with two decimals. For example, if you find the answer
to be 10.526%, submit 10.53.
8. You are provided with the following data on the economy and the expected returns
of Jay Fund and Kay Fund:
State of the Economy Probability Jay Fund Kay Fund
Recession 50% –10% 20%
Normal 30% 20% –20%
Boom 20% 45% 20%

Which of the following statements below is correct?

I. The expected return of Jay Fund is 10.0%

II. The expected return of Kay Fund is 8.0%.
III. The standard deviation on returns for Jay Fund is 21.8%.
IV. The standard deviation on returns for Kay Fund is 18.3%.

A. I and II only.
B. I and III only.
C. II, III and IV only.
D. I, II and IV only.
E. All of the above.

9. In a one-factor economy, the following data are available relating to the performance
of three funds and the market portfolio:
Expected Standard Deviation Beta
Return on Returns
Fund A 8% 16% 0.7
Fund B 17% 32% 1.3
Fund C 28% 45% 1.6
Market Portfolio 10% 18% 1.0
The risk-free rate is 2%.
Which fund would you choose if you currently do not have any investment portfolio?

10. You purchased 270 shares of a mutual fund at a price of $80 per share at the
beginning of the year and paid a front-end load of 4%. The fund had a management
fee of 1%. Your net return (in dollars) at the end of the year was $1,260. By how
much did the securities in which the fund invested increase in value during the year?

Note: Answer in percentages with two decimals. For example, if you find the answer
to be 10.526%, submit 10.53.
11. It is argued that the Optimal portfolio produced using the Single Index model is
inferior to that produced by the Markowitz Portfolio theory because __________.

A. The Single Index model assumes residual correlation among stocks is zero.
B. The Single Index model decentralizes macro analysis and security analysis.
C. The Single Index model allows for alpha.
D. The Single Index model uses too many terms.
E. The Single Index model assumes only one macro factor of risk.

12. Consider the multifactor asset-pricing model with two factors.

Portfolio X has an expected return of 24%, a beta of 1.5 on factor 1 and a beta of 2.0
on factor 2.
Portfolio Y has an expected return of 32% and a beta of 2.2 on factor 1.
The risk premium on the factor 1 portfolio is 4%.
The risk-free rate of return is 5%.
Given that Portfolio X and Portfolio Y are fairly priced, what is the beta on factor 2
for Portfolio Y?
Note: Answer with two decimals. For example, if you find the answer to be 10.526,
submit 10.53.

13. Consider two risky securities A and B. A has an expected rate of return of 30% and a
standard deviation on returns of 48%. B has an expected rate of return of 18% and a
standard deviation on returns of 32%. The correlation coefficient of returns for
securities A and B is 0.21. What is the standard deviation on returns for the
minimum variance portfolio formed by combining A and B?
Note: Answer in percentages with two decimals. For example, if you find the answer
to be 10.526%, submit 10.53.

14. You have put together some comparative performance numbers that relate to Gee
Fund and a benchmark.

Gee Fund Benchmark

Weight Return Weight Return
Equity 70% 14% 60% 13%
Bonds 10% 6% 30% 8%
Money Market 20% 1% 10% 1%

How much was the contribution of Security Selection to the comparison in total
performance between Gee Fund and the Benchmark?
Note: Answer in percentages with two decimals. For example, if you find the answer
to be 10.526%, submit 10.53.
15. Black Swan stock price and dividend history are as follows:
Beginning-of- End-of-Year Dividend paid at
Year
Year Price Price Year-end
2019 $50 $65 $1.50
2020 $65 $55 $2.20
2021 $55 $45 $1.20
2022 $45 $51 $1.20
An investor buys 100 shares at the beginning of 2019, buys another 20 shares at the
beginning of 2020, sells 80 at the beginning of 2021 and sells the remaining 40 at the
beginning of 2022.

Which of the following statements is/are correct?

I. The time-weighted return of the investment is –0.57%.

II. The time-weighted return of the investment is –0.42%.
III. The dollar-weighted return of the investment is 2.77%.
IV. The dollar-weighted return of the investment is 1.65%.

A. I and III only.

B. I and IV only.
C. II and III only.
D. II and IV only.
E. None of the above.

16. Which of the following statements regarding the Capital Allocation Line (CAL) is/are
correct?

I. The CAL represents the opportunity set of an investor with access to risky assets
and the risk-free asset.
II. The CAL is the line that joins the risk-free asset and the minimum variance
portfolio.
III. The CAL is not a straight line if the borrowing rate is higher than the lending rate.
IV. The tangent point of the CAL to the efficient frontier is called the Optimum
Complete Portfolio.

A. I and II only.
B. I and III only.
C. II, and III only.
D. I, III and IV only.
E. None of the above.
17. Mrs. Starr was with her financial advisor the other day. She explained that she would
like to invest only in domestic stocks. This is an example of __________.

A. Mental Accounting.
B. Self-attribution bias.
C. Recency bias.
D. Anchoring.
E. Familiarity bias.

18. Which of the following statements below about Asset Pricing Models and the
Arbitrage Pricing Theory is/are correct?

I. The Arbitrage Pricing Theory only applies for single-factor models.

II. The Arbitrage Pricing Theory results in a similar SML relationship between return
and beta as the CAPM but with fewer assumptions.
III. The CAPM implies that investors require a higher return to hold highly volatile
securities.
IV. The three factors in the Fama French 3-factor model are the Market factor (rm-rf),
Size factor (SMB) and Value factor (HML).

A. I and II only.
B. I and IV only.
C. II and III only.
D. II and IV only.
E. II, III and IV only.

19. Which of the following statements below regarding Portfolio Theory is correct?

A. An investor who can tolerate more risk will optimally invest a smaller
proportion in the portfolio of risky assets.
B. An increase in a risky portfolio’s volatility will increase allocation in the risky
portfolio.
C. An increase in risk premium for the risky portfolio will increase allocation in the
risk-free asset.
D. An investor that is more risk averse will have steeper indifference curves.
E. If two portfolios have the same expected return, the portfolio with the higher
standard deviation is said to dominate the other portfolio.
20. Which of the following statements below about performance measures of Active
strategies is correct?

A. Managers of style-specific portfolios do not want to be evaluated by the Treynor

Measure.
B. Active managers demonstrate good market timing by having a steeper
regression line when the market risk premium is positive than when the market
risk premium is negative.
C. A portfolio ranked highly by the M2 measure can be ranked poorly by the Sharpe
ratio.
D. The Treynor measure is the only performance measure that provides statistical
significance of the result.
E. The Information ratio is found by dividing Alpha by the residual variance of the
portfolio.