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Midterm Exam Portfoliomanagement Fall 2019

This document summarizes a midterm exam for an investments and portfolio management course. The exam has three parts: Part A asks students to identify equations related to the capital market line and security market line, name common stock performance measures, and choose which statement about portfolio diversification is correct. Part B provides return, variance, and covariance data for two stocks and the market portfolio to calculate expected returns, variances, betas, and equilibrium returns for portfolios of the two stocks. Part C asks students to distinguish between naive and efficient diversification and explain the differences between four types of investors based on their risk-return preferences.

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119 views

Midterm Exam Portfoliomanagement Fall 2019

This document summarizes a midterm exam for an investments and portfolio management course. The exam has three parts: Part A asks students to identify equations related to the capital market line and security market line, name common stock performance measures, and choose which statement about portfolio diversification is correct. Part B provides return, variance, and covariance data for two stocks and the market portfolio to calculate expected returns, variances, betas, and equilibrium returns for portfolios of the two stocks. Part C asks students to distinguish between naive and efficient diversification and explain the differences between four types of investors based on their risk-return preferences.

Uploaded by

eya feguiri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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University of Tunis

Tunis Business School


Investments and Portfolio Management
Midterm Exam
Fall 2019 Senior Finance Dr: Manara Toukabri
Duration: 1H30 (Major and Minor)

Part A (30 points)


I. Identify and draw the equations of the CML and the SML (5points)?
II. Give the most known stock measures of performance (5 points)
III. Which of the following statements about portfolio diversification is correct
(5 points):
a) Proper diversification can reduce or eliminate systematic risk.
b) Diversification reduces the portfolio’s expected return because diversification
reduces a portfolio’s total risk.
c) As more securities are added to a portfolio, total risk typically would be expected
to fall at a decreasing rate.
d) The risk-reducing benefits of diversification do not occur meaningfully until at
least 30 individual securities are included in the portfolio.
IV. Capital assets pricing theory asserts that portfolio return are best explained by
(5 points):
a) Economic factors
b) Specific risk
c) Systematic risk
d) Diversification
V. What is the expected return of a zero-beta security (5points)?
a) Market rate of return
b) Zero rate of return
c) Negative rate of return
d) Risk-free rate of return
VI. Within the context of CAPM, assume:
 Expected return on the market=15%
 Risk-free rate= 8%
 Expected rate of return on XYZ security=17%
 Beta of XYZ=1,25
Which one of the following is correct: (5points)
a) XYZ is overpriced
b) XYZ is fairly priced
c) XYZ’s alpha is -0,25%
d) XYZ’s alpha is 0,25%

Part B (60 points)


The table below summarizes data of stock (A), stock (B), market portfolio and risk-free rate:

A B M Rf
E(R) 30% 20% 25% 5%
V(R ) 18% 10% 10% -
Cov( R A , R B ¿ 5%
Cov( R A , R M ¿ 15%
Cov( R B , R M ¿ 5%

An investor decides to constitute a portfolio (P) composed by 70% of stock (A) and 30% of
stock (B).

1) Calculate the expected return of the portfolio (P)? (5points)


2) Calculate de variance of the portfolio (P)? (5 points)
3) Identify the appropriate proportion of wealth invested in stock (A) and stock (B) in
order to obtain the minimum risk portfolio? (15points)
4) Calculate the expected return of the minimum risk portfolio? (5points)
5) Calculate the variance of the minimum risk portfolio? (5points)
6) Calculate the Beta of stock (A), stock (B) and portfolio (P)? (10 points)
7) Calculate the equilibrium expected return of the stock (A), the stock (B) and the
portfolio (P)? Comment? (15 points)

Part C (10 points)


I) Give the distinction between « Naive » and « Efficient » diversification? (5points)

II) Give the difference between investors on points (A), (B) and (C), (D)? (5points)
E(R) E(R) indifference curve
Indifference curve
CAL CAL

B
A
C D
Risk Risk

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