Assignment+3_FFM_2014_SampleMidterm

8/10/2019 Assignment+3_FFM_2014_SampleMidterm

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Sample Midterm Exam Fall 2014

Due Date: October 14, 2014

First Name: _________________ Last Name: ____________________________

Student ID: _________________________

NYUAD Code of Conduct: “I pledge my honor that I have not violated the NYUAD Student

Code of Conduct in the completion of this examination.”

Signature: __________________________________________________

The sample mid-term is divided into two sections. Multiple choice questions and Numerical

based questions. Starting on page 2, you will find Question 1 with 5 multiple choice questions.

Similarly Questions 2 and 3 are numerical questions. Write your name on this page. Multiple

choice questions are graded on a correct/incorrect basis. For the numerical questions, write down

how you got the answer in the space provided below the questions and write your final answer.

For the two numerical questions, there will be partial credit awarded for incorrect or partially

incomplete answers if some of the work is correct. To receive partial credit, you must show your

work in the space provided after each question.

Write legibly and only in the space provided. Be brief. Unless the question explicitly states

otherwise, I am looking for one answer. The point distribution is written next to each question

and each part. The maximum number of points you can earn is 30 and the total weight for the

sample midterm is 5%.

If you get stuck on a question, move on. You have 75 minutes to complete the exam.

Allocation of time and Marks:

Question 1: (maximum allocation of time: 10 minutes) Total Marks: 5



Good luck!



Question 1: Multiple Choice Questions (Points: 5)

(a) You put up $50 at the beginning of the year for an investment. The value of the

investment grows 4% and you earn a dividend of $3.50. Your HPR was ____.

A. 4.00%

B. 3.50%

C. 7.00%

D. 11.00%

(b) An investor's degree of risk aversion will determine his or her ______.

A. optimal risky portfolio

B. risk-free rate

C. optimal mix of the risk-free asset and risky asset

D. capital allocation line

(c) Consider the CAPM. The risk-free rate is 6% and the expected return on the market is

18%. What is the expected return on a stock with a beta of 1.3?

A. 6%

B. 15.6%

C. 18%

D. 21.6%

(d) You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of

.90. The beta of this portfolio is _________.

A. 1.14

B. 1.20

C. 1.26

D. 1.50



(e) If the simple CAPM is valid and all portfolios are priced correctly, which of the situations

below are possible? Consider each situation independently and assume the risk free rate

is 5%.

A. Opiton A

B. Opiton B

C. Opiton C

D. Opiton D





(c) Suppose you plan to invest the payments for six years. What is the future value if the

payments are an ordinary annuity? (2 Points)

(d) Suppose you plan to invest the payments for six years. What is the future value if the

payments are an annuity due? (2 Points)



(e) Which has the higher present value, the ordinary annuity or annuity due? Which has the

higher future value? (2 Points)



Question 3: (Points: 15)

Imagine you are a financial analyst. Mr. Green (one of your clients) sets up an appointment with

you to discuss how he can allocate his wealth between two risky assets and a risk free asset. You

provide him with the following set of information:

(Note that and )Asset A: Asset B: Asset C:

Correlation between two risky assets

Mr. Green thinks that a combination of two risky assets will result in a more risky portfolio.

Your job is to convince Mr. Green that adding two risky assets (using the above data) will result

in a diversified portfolio. In addition you also need to explain to Mr. Green how he should

allocate his wealth between risky and risk free assets. To do that, answer the following questions:

(1) Use the table below to explain Mr. Green the efficient frontier curve. You have to plot

expected return of the portfolio on the y axis and standard deviation of the portfolio on

the x axis. (You are plotting column 3 and column 4). Also Mark with symbol X the

global minimum portfolio. (1 Point)

Weight (A) Weight (B)

-0.1 1.1 26.5 0.55

0.0 1.0 25.0 0.50

0.5 0.5 17.5 0.29

0.7 0.3 14.5 0.22

0.9 0.1 11.5 0.20

1.0 0.0 10.0 0.20





(2) When you show the efficient frontier curve, Mr. Green gets excited about the global

minimum variance portfolio and therefore he would like to know how he can get to the

minimum variance portfolio. (Find the weights attached to each risky asset in the

portfolio as well as the corresponding expected return and standard deviation of such a

portfolio). (3 Points)

(3) Mr. Green insists that he would like to invest his wealth such that he puts some wealth in

risk free asset and some in the global minimum variance portfolio. You would need to

convince him that mixing risk free asset with a minimum variance portfolio is not

optimal.

a.

Find the optimal risky portfolio P along with its expected return and standard

deviation. (3 Points)



b. Find the equation of the capital allocation line generated by the

optimal risky portfolio and risk free portfolio. (This question requires you to find

the intercept and the slope of the capital allocation line. Hint: For slope: use

Sharpe ratio.) (2 Points)



c. Find the equation of the capital allocation line-minimum ( generated by

the global minimum portfolio and risk free portfolio. (This question requires you

to find the intercept and the slope of the capital allocation line-minimum. Hint:

For slope: use Sharpe ratio.) (2 Points)

d. Compare the answers to part b and c to convince Mr. Green that is

better than . (2 points)



e. Mr. Green now insists that his risk aversion is much higher and therefore asks you

to find different optimal weights for optimal risky portfolio (compared to the

weights you recommended in part 3a). How would you respond to Mr. Green’s

request? (2 points)



Formula Sheet:

(1)

where n = number of compunding periods per year

(2) ∑

(3) ∏



√

() () (̅ )

(13)

( ) ( )( ) ( ) ( )

er r r r i f mii f i



{ [ ]

}⏟

]

∑ Where is the weight attached to the beta on the

basis of wealth invested in each asset.

( )

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Assignment+3_FFM_2014_SampleMidterm