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1. Which of the following determine(s) the level of real interest rates? I) The supply of savings by households and business firms II) The demand for investment funds III) The government's net supply and/or demand for funds a. I only b. II only c. I and II only d. I, II, and III 2. You have been given this probability distribution for the holding-period return for Cheese, Inc. stock: Stock of the Economy Probability HPR Boom 0.20 24 % Normal growth 0.45 15 % Recession 0.35 8 % Assuming that the expected return on Cheese's stock is 14.35%, what is the standard deviation of these returns? a. 4.72% b. 6.30% c. 4.38% d. 5.74% e. None of the options are correct 3. Which of the following measures of risk best highlights the potential loss from extreme negative returns? a. Standard deviation b. Variance c. Upper partial standard deviation d. Value at risk (VaR) e. None of the options are correct 4. You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05.What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.09? a. 85% and 15% b. 75% and 25% c. 67% and 33% d. 57% and 43% e. Cannot be determined 5. Other things equal, diversification is most effective when a. securities' returns are uncorrelated. b. securities' returns are positively correlated. c. securities' returns are high. d. securities' returns are negatively correlated. e. securities' returns are positively correlated and high. 6. You are creating a complete portfolio for a client. Use the information given to create the portfolio. You have decided to use two asset to create your optimal risky portfolio, Asset A and Asset B. Asset A has an expected return of 5% and a risk (standard deviation) of 10%. Asset B has an expected return of 10% and a risk of 15%. The correlation between Asset A and Asset B is 0.6. The risk free rate is 1%. You calculated the weights to the optimal risky portfolio to be 15% in Asset A and 85% in Asset B. a. What is the expected return of the optimal risky portfolio?b. What is the variance of the optimal risky portfolio? c. What is the Sharp ratio of the optimal risky portfolio? d. After you constructed the optimal risky portfolio, your client tells you that she has a risk aversion of 10. You use that information to construct a complete portfolio for her using the risk free asset and the optimal risky portfolio created with Asset A and Asset B. How much of her portfolio (in percentages) should be invested in the optimal risky portfolio?e. What is the expected return of her complete portfolio? f. What is the standard deviation of her complete portfolio? g. What is the Sharp ratio of her complete portfolio?7. You purchased 100 shares of a stock with a price of $100 per share at the beginning of the year and sold all of your shares after six month. Your selling price of the shares was $125 per share. The stock paid a $1.5 dividend per share before you sold the shares. a. What is your holding period return for this six-month period? b. Assuming that you would be able to reinvest your money at the same six –month holding period return, what would be your effective annual rate for this investment? c. Suppose the annual inflation rate during the year was 5%. If you were to reinvest your money at the six-month holding period return rate, what would be the exact actual growth rate of your purchasing

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