Questions 1-6 refer to the following information

Consider an asset universe containing only two risky securities and a risk-free
security paying rF = 2%. The two risky securities are characterised by the
following expected return and variance covariance matrix:

 = 0.10 and  = 0.10 0.00

0.20 0.00 0.25

Answer the following questions:

1. The value of the scalars A, B and C are closest to:

(a). A = 116, B = 13.2, and C = 1.640.

(b). A = 14.0, B = 1.80, and C = 0.260.
(c). A = 5.16, B = 0.72, and C = 0.110.
(d). A = 0.35, B = 0.06, and C = 0.011.

2. The expected return of the tangency portfolio is closest to:

(a). 15.00%.
(b). 14.74%.
(c). 12.86%.
(d). 12.75%.

3. The portfolio weights of the tangency portfolio are closest to:

(a). (0.800, 0.720)T

(b). (0.725, 0.275)T
(c). (0.714 0.286)T
(d). (0.526, 0.474)T

4. The amount of borrowing required (i.e., the weight in the risk-free asset) to
obtain an efficient portfolio with 20% expected return is closest to.

(a). 𝜘0 = -1.00.
(b). 𝜘0 = -0.41.
(c). 𝜘0 = -0.22.
(d). 𝜘0 = 0.00.

5. If borrowing (i.e., short selling the risk-free asset) was not allowed, the
weights of the efficient portfolio with 20% expected return would be closest to:

(a). (0.00, 1.00)T

(b). (0.50, 0.50)T
(c). (1.00, 0.00)T
(d). (1.00, 0.56)T
6. All else being equal, if the risk-free rate increased, the return of the tangency
portfolio would most likely:

(a). decrease.
(b). increase.
(c). stay the same.
(d). undetermined.

Questions 7-10 refer to the following information

Asset Expected Return Standard Deviation Beta Residual Variance

1 0.13 (?) 2 0.49
2 0.05 (?) 0 0.36
3 (?) 0.150 1 0.00
4 0.08 0.113 (?) 0.00

Furthermore it is known that the four assets are correctly priced according to
the CAPM with unlimited borrowing and lending (at the same rate).

Answer the following questions:

7. The standard deviation of Asset 1 is closest to:

(a). 1.044.
(b). 0.889.
(c). 0.762.
(d). 0.580.

8. The standard deviation of Asset 2 is closest to:

(a). 0.60.
(b). 0.36.
(c). 0.13.
(d). 0.00.

9. The expected return of Asset 3 is closest to:

(a). 0.130.
(b). 0.115.
(c). 0.090.
(d). 0.065.

10. The beta of Asset 4 is closest to:

(a). 1.23.
(b). 0.89.
(c). 0.75.
(d). 0.33.
Questions 11-14 refer to the following information

Consider the following variance-covariance matrix:

 = 0.02 0.01 0.03

0.01 0.01 0.01
0.03 0.01 0.05

where the portfolio in position one is identified as the market portfolio M and
those in positions two and three are denoted portfolios A and B, respectively.

Answer the following questions:

11. The beta values for portfolio A and B are closest to:

(a). A = 2.00 and b = 0.67.

(b). A = 0.71 and b = 1.22.
(c). A = 0.50 and b = 1.50.
(d). A = 0.07 and b = 0.21.

12. The correlation coefficient between A and B is closest to:

(a). 0.707.
(b). 0.447.
(c). 0.316.
(d). 0.010.

13. Assuming the single-factor model, the estimate for the covariance between A
and B is closest to:

(a). 0.447.
(b). 0.106.
(c). 0.015.
(d). 0.011.

14. Which of the following assumptions of the single factor model (SFM) is most
likely violated when additional factors strongly influence all stocks in your
analysis?

(a). Cov(rA, rb) = 0

(b). Cov(rA, rM) = 0
(c). Cov(A, rM) = 0
(d). Cov(A, b) = 0