atSAMPLE MIDTERM QUESTIONS Joel Hasbrouck Adapted from problems originally composed by William L. Silber . I. 1. Midterm questions Assuming that the proceeds of each year are reinvested in the following years, calculate the geometric average annual return from the following sequence of returns: YR 1 = +.20, YR 2 = .15, YR 3 = +.10, YR 4 = +.06 (a) .1263 (b) .0525 (c) .0835 (d) .0443 According to modern portfolio theory, the idea that investors with different indifference curves will hold the same portfolio of risky securities is a result of: (a) diminishing marginal utility of income (b) covariance (c) the separation theorem (d) the normal distribution assumption Within the framework of modern portfolio theory, if portfolios A and B have the same return but portfolio A has less risk, then: (a) portfolio B is inefficient (b) portfolio A is inefficient (c) portfolio B cannot exist (d) you must hold both A and B In a portfolio where you own positive amounts of two risky assets, the standard deviation of the portfolio cannot be reduced below the standard deviation of the lower risk asset if the correlation of returns between the two assets is: (a) 0 (b) 1.0 (c) -1.0 (d) none of the above According to modern portfolio theory, a risk neutral investor will choose an optimal portfolio (a) to maximize risk (b) to maximize return (c) to minimize risk (d) any of the above The capital allocation line will be a straight line: (a) when investors can borrow and lend at the risk free rate (b) when investors are risk neutral (c) when securities have zero covariance (d) when the risk free asset has the highest return of any security (e) all of the above Within the framework of the supply and demand for credit, government deficits lead to: a) An inward shift in the demand curve, and therefore increased interest rates. b) An inward shift in the demand curve, and therefore decreased