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FIN 411
April 2016
Sample Final Exam1
E(R)
0.12
0.15
0.21
0.24
0.30
0.50
0.16
0.21
U = E(R) 1/2 A 2
1.
(4 points)Based on the utility formula above, which investment would you select if you
were risk averse with A = 4?
2.
(4 points)Based on the utility formula above, which investment would you select if you
were risk neutral?
3.
(6 points) Your client chooses to invest 70 percent of a portfolio in your fund and 30
percent at the risk free rate. What is the expected return and standard deviation of your
clients portfolio?
5. (4 points) Suppose your risky portfolio includes the following investments in the given
proportions:
Stock A:
27 percent
Stock B:
33 percent
Stock C
40 percent
What are the investment proportions of your clients overall portfolio in A, B, C and RF?
6.
7. (6 points) Suppose the same client prefers to invest in your risky portfolio a proportion
WP of his total investment so that his overall portfolio will have an expected return of 15
percent. What is the proportion WP?
8. (8 points) Suppose the same client prefers to invest in your risky portfolio a proportion
WP of his total investment that maximizes the expected return on his overall portfolio
subject to the constraint that the overall portfolios standard deviation will not exceed 20
percent.
a. What is the proportion WP?
b. What is the expected return on his overall portfolio?
9. (10 points) Suppose the following two stocks are traded in the market and that it is
possible to borrow at the risk-free rate.
Stock
E(R)
A
B
0.08
0.13
0.40
0.60
10.
(10 points)
Assume the following two stocks:
Stock X
E(R) = 20 percent.
Standard Deviation = 50%.
Stock Y
E(R) = 16 percent.
Standard Deviation =35%.
11. (8 points) Consider the following two investment alternatives. First, a risky portfolio, P,
which earns 30 percent rate of return with a probability of 70 percent or 8 percent with a
probability of 30 percent. Second, a treasury bill that pays 4 percent.
If you invest $100,000 in the risky portfolio and $80,000 in the treasury-bill, what
would your expected profit (in dollars) be?
12.
(6 points) A treasury bill pays 5 percent. Which of the following investments would
not definitely be chosen by a risk-averse investor? (You must explain).
a.
b.
c.
d.
13.
Portfolio
Expected Return
15%
Variance of
returns
20%
15%
10%
10%
10%
20%
15%
14.
(20 points)
Assume the following two stocks:
Stock X
Stock Y
E(R) = 15 percent.
Standard Deviation = 25%.
E(R) = 10 percent.
Standard Deviation =15%.
Construct your optimal portfolio, C. (i.e. what are the weights of the risk-free security, X,
and Y in your optimal portfolio?).