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Exam 6: Portfolio Theory

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Question 71

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You want to buy $20,000 worth of shares in Tootsie Roll Industries Inc. on margin, but you only have $10,000 of your own money to invest. The remaining $10,000 is borrowed by issuing T-Bills; assume the cost of borrowing is the risk-free rate. The weight of Tootsie Roll Industries in your portfolio is 2.0. The weight of T-Bills in your portfolio is -1.0. Assume that Tootsie Roll has a beta of 0.75. What is the beta of the portfolio?

A) 0.75
B) 1.25
C) 1.50
D) 1.75
E) 2.00

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Question 72

Multiple Choice

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The CAPM equation includes all of the following EXCEPT:

A) Market Risk Premium
B) Risk Free Rate
C) Standard Deviation
D) Beta
E) The Return on the Market

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Question 73

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________ risk ________ be eliminated through greater diversification and is due to firm-specific or industry-wide factors such as strikes or resource price changes.

You are considering investing in Stock ABC. This stock has an expected return of 14%, the risk free rate is 5%, and the market risk premium (or Treynor Index) is 8%. What is the beta of Stock ABC?

In a well-diversified portfolio, the most relevant type of risk to a well-diversified investor is

When buying on margin, the amount of money provided by the investor is called:

The table below shows selected financial data for the Turtle Income fund, the Hare Growth fund, the market portfolio and the risk free asset. What is the market's Treynor Index? $\begin{array} { | c | c | c | c | c | } \hline & \text { Turtle } & \text { Hare } & \text { Market } & \text { Risk Free } \\\hline \begin{array} { c } \text { Expected } \\\text { Return }\end{array} & 10 \% & 13 \% & 12 \% & 5 \% \\\hline \text { Std Dev. } & 8.5 \% & 17.9 \% & 11.9 \% & 0 \% \\\hline \text { Beta } & 0.7143 & 1.4 & 1 & 0 \\\hline\end{array}$

The ________ shows the possible risk/return combinations for a portfolio.

You have been scouring The Wall Street Journal looking for stocks to add to your (large) portfolio. The table presents data that you have collected on four stocks that look promising. You have calculated the return that you anticipate earning from each stock along with its beta. Which of the four securities should you add to your portfolio? (Assume you must choose just one.) Assume the risk-free rate is 7.00% and the market risk premium is 2.00%. $\begin{array} { | c | c | c | } \hline \text { Stock } & \begin{array} { c } \text { Anticipated } \\\text { Return }\end{array} & \text { Beta } \\\hline \text { A } & 9.01 \% & 1.70 \\\hline \text { B } & 7.06 \% & 0.00 \\\hline \text { C } & 8.74 \% & 0.87 \\\hline \text { D } & 11.50 \% & 2.50 \\\hline\end{array}$

You manage a portfolio in which you invest half of your money in T-Bills and the other half in a mutual fund that is indexed to match the market portfolio. What is the beta of this portfolio?

L9 Corp. has a beta of 1.34 and an expected return of 21%. If the market return is 17%, what is the return you would expect to get from a T-Bill?

The risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent. What is the beta of Security J?

An individual's portfolio consists of three separate assets. Asset 1 has a beta of 1.4, asset 2 has a beta of .84 and asset 3 has a beta of 1.05. The investor has invested $240 in asset 1, $500 in asset 2, and $260 in asset 3. Calculate the portfolio beta.