GEORGIA STATE UNIVERSITY Robinson College of Business FI 4000 Exam 1 Fall 2020 Name Milind Shrikhande Last First You have 150 minutes to print the exam answer all the questions scan the exam and Student ID Date 09 17 2020 Instructions Read carefully 1 upload the exam as single PDF file to iCollege Assignments OR type into exam file and upload as PDF file to iCollege Assignments 2 3 You can use financial calculators and your own help sheet see below Partial credit will be given for showing your work in detail correct approach to the problem and writing legibly You must write your final answer clearly State your assumptions if any clearly For questions requiring numerical work whether multiple choice or numerical problems no credit will be given unless the working is shown as part of your answer Manage your time well during the test 4 5 Answer all questions The total score is 100 points You may refer to the e book notes and or videos during the exam but using a help sheet 8 5 x 11 is recommended to help you manage time Good Luck Honor Codes You are expected to follow the Honor Code Any violation of the code will be reported to the concerned authority Statement I have completed this exam on my own with no help from any other person Signature 1 Multiple Choice Questions 20 points Choose the correct answer from the following choices Make your selection clear and distinct otherwise you will not get credit 1 Asset A has an expected return of 15 and standard deviation of 20 Asset B has an expected return of 20 and standard deviation of 15 The riskfree rate is 5 A risk averse investor would prefer a portfolio using the risk free asset and A asset A B asset B C no risky asset D cannot tell from data provided 2 The type of risk which is priced in the market is called A systematic risk B unsystematic risk C systematic and unsystematic risk D idiosyncratic risk 3 Diversification is not effective when security returns are A imperfectly negatively correlated B negatively correlated C perfectly positively correlated D positively correlated 4 The Sharpe ratio is useful for A borrowing capital for investing B investing available capital C correctly forming portfolios D rank ordering portfolios 5 The least risky portfolio can be identified by finding A the minimum variance point on the efficient frontier B the maximum return point on the efficient frontier C the tangency point of the capital allocation line and the efficient frontier D none of the above answers is correct 2 10 points Conceptual Questions 1 Choose TRUE FALSE for the statements below from A to C Make your selection clear and distinct otherwise you will not get credit Let an investor be considering two risky portfolios X and Y to construct a complete portfolio C with a risk free asset The reward to variability ratio of portfolio X is 0 18 and reward to variability ratio of portfolio Y is 0 14 Choose TRUE FALSE for the following statements A Higher reward to variability ratio of portfolio Y implies that its capital allocation line has a lower slope than that for the capital allocation line for X 4 points TRUE FALSE B CAL Y will plot above CAL X TRUE FALSE 4 points C Combination of portfolio X and risk free asset will provide higher expected return for any level of risk than combination of portfolio Y and risk free asset 2 points TRUE FALSE Conceptual Questions 2 Aimee is considering investing in two risky portfolios ABC and XYZ She wants to choose one risky portfolio either ABC or XYZ for investment purposes OR both risky portfolios 10 points A If she decides to construct a complete portfolio by choosing both risky portfolios and a risk free asset what will determine the risky portfolio choice for Aimee s investment 4 points a Reward to variability ratio Sharpe Ratio b Minimum variance portfolio c Optimal risky portfolio B Once she has selected just one risky portfolio what factor characteristic will explain her allocation of wealth between the risky portfolio and risk free asset in the complete portfolio Why Hint Use a graph to reflect on what you will explain in words 6 points 3 Short Numerical Problems Problem 1 10 points A A mutual fund manager is offering a portfolio that will provide return of 7 8 9 and 6 over the next four quarters respectively What is the geometric average return per quarter 4 points B Suppose you bought some stock at the beginning of the year for 55 per share At the end of the year the price is 40 per share During the year you got a 1 25 dividend per share Compute the holding period return and dividend yield over a one year period 3 points C The variance of returns on investment A is 0 0225 while the variance of returns on investment B is 0 04 If the correlation coefficient between the returns on A and B is 0 5 compute covariance of returns on A and B 3 points 4 20 points Problem 2 You are considering investing in three different assets The first is a stock the second is a long term government bond and the third is a T bill money market fund that yields a sure rate of 5 The probability distributions of both the risky assets Stock S Bond B The correlation between the stock and bond returns is 0 10 Expected Return 15 9 Standard Deviation 32 23 A Compute the expected return and standard deviation of the optimal risky portfolio aka optimal tangency portfolio 10 points 5 B If as the investor you want an expected return of 12 from a complete portfolio C formed by using the optimal portfolio P and risk free rate what proportions of X Y and risk free asset should the investor be holding in his her complete portfolio 10 points 6 Problem 3 10 points A Use the following information to answer the questions below Security Return S1 Return S2 16 12 A B Risk free asset return 4 S1 is State 1 and S2 is State 2 20 25 Prob S1 0 6 Prob S2 0 4 i What is the expected return on Security A and the expected return on Security B 2 points ii What is the standard deviation of returns of an equally weighted portfolio made up of Security A and Security B 3 points 7 continued Problem 3 A pension fund manager is considering three mutual funds The first is a stock fund the second is a long term government and corporate bond fund and the third is a T bill money market fund that yields a sure rate of 5 The probability distributions of the risky funds are Stock fund S Bond fund B The correlation between the fund returns is 0 10 Expected Return 15 9 Standard Deviation 32 23 What is the Sharpe ratio for the minimum variance portfolio MVP 5