1. You short sell 100 shares at $50/share. Your initial margin was 50%.

You close your short position at

$40/share. What is the return on a short sale on margin if a $2 dividend is paid, and only the initial
margin was deposited?
a. 32%
b. -20%
c. 20%
d. 40%

2. Stock A has an expected return of 8%, a standard deviation of 33%, and a Beta (p) of 1.3. The market
index has an expected return of 9% and a standard deviation of 19%. What is the systematic portion
of Stock A's risk? (Express as standard deviation, not variance.)
a. 17.4%
b. 19%
c. 24.7%
d. 14%

3. Suppose you are forming a complete portfolio with differing risk-free borrowing and risk-free lending
rates. If your allocation to the risky asset is greater than 100%, which risk-free rate will be in your
portfolio?
a. It doesn't matter which you choose
b. Lending rate
c. It depends on the type of risky asset.
d. Borrowing rate

4. What are the total assets immediately following a margin purchase of 100 shares at $50/share given
an initial margin requirement of 40%.
a. $3,000
b. $5,000
c. $2,500
d. $2,000
e. None of the above

5. A mutual fund with 100 shares outstanding ends the year with a NAV of $15. Over the prior year,
assets grew by 5%. Assume management expense of 1% based on end-of-year assets. What is the
NAV at the beginning of the year (before the 5% growth).
a. $14.85
b. $14.14
c. $14.29
d. $14.43
 6. Would you ever want to invest in an asset that you knew was declining in value?
a. Yes, because it might go up in value.
b. No, why would you ever buy something you knew would lose value?
c. Yes, because the dividend yield might yield might outweigh the capital gains yield.
d. Yes, because the capital gains yield might outweigh the dividend yield.

7. Given the order book below, what is the average price I can buy 300 shares using a market order?

Ask (limit
Bid Size Bid (limit buy) sell) Ask Size
50 35 36 100
150 34.75 36.5 200
100 34.25 37 250
400 34 37.5 250

a. $36.50
b. $36.33
c. $36
d. $36.25

8. If you believe markets are informationally efficient, then which of the following would you invest in?
a. hedge fund
b. active fund
c. individual stock
d. broad based market index
e. None of the above

9. All else held constant, which of the following will increase the allocation to the risky asset?
a. An increase in the risk-free rate
b. A decrease in the expected return of the risky asset
c. An increase in risk aversion
d. A decrease in the volatility of the risky asset
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10. Which of the following is not an interpretation of alpha?

a. Free return beyond that due to risk exposures
b. Compensation for missing risk exposures
c. Market mispricing
d. None of the above.
 11. Given the time series of historical stock returns below, what is the standard deviation? (Hint: the
expected return is 4%)

Time Period 1 2 3 4 5
return (%) 5% -7% 12% 13% -3%

a. 7.585%
b. 0.79%
c. 8.888%
d. 2.155%
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12. Which of the following is not a reward-to-risk ratio?

a. Information Ratio
b. Alpha
c. Sharpe ratio
d. All of the above are reward-to-risk ratios

13. Which of the following is a real asset?

a. TSLA stock
b. US dollar
c. municipal bond
d. factory

14. What is the offering price of a mutual fund with 20 million in assets, 50,000 shares outstanding and
no liabilities and a front-end load of 2%?
a. $392.16
b. $400.00
c. $411.67
d. $408.16

15. Asset A has an expected return of 15% and standard deviation of 18%. Asset B has an expected
return of 20% and standard deviation of 25%. The risk-free asset pays 5%. Which asset would you
prefer?
a. Asset A
b. Asset B
c. Risk-free asset
d. None of the above
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 16. Using the table below, calculate the bid price of a T-Bill maturing on June 28, 2021. Assume a face
value of $1000.

Maturity Days to Maturity Bid (%) Asked (%)

Mar 11, 2021 10 2.555 2.544
Apr 17, 2021 44 2.602 2.459
June 28, 2021 119 2.4 2.25

a. $996.820
b. $992.067
c. $996.995
d. $992.563

17. Suppose you wish to form an optimal risky portfolio consisting of an active portfolio and a passive
portfolio. Which of the following will decrease the weight of the active portfolio?
a. An increase in the alpha of the active portfolio.
b. A decrease in the correlation of the active portfolio.
c. A decrease in the r-squared of the active portfolio.
d. An increase in the residual standard deviation of the active portfolio.
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18. If the NPV of investing in a stock is 0, why would anyone ever invest in this stock?
a. Nobody will ever invest if the NPV of doing so is 0.
b. To benefit from a riskless return.
c. To "beat the market."
d. To smooth and/or increase future consumption.

19. Suppose you wish to form a risky portfolio of two risky assets. Which of the following correlations
between A and B will maximize the Sharpe ratio of the portfolio?
a. -0.5
b. 0.5
c. 0
d. 1
e. The correlation doesn't affect the Sharpe ratio.

20. 20Which of the following maximizes the Sharpe Ratio of the complete portfolio?
a. Tangency portfolio
b. Single risky stock
c. Global minimum variance portfolio
d. Active portfolio
21. Which of the following is most likely to prefer a corporate bond over a muni bond?
a. a CEO
b. a student
c. a pro football player
d. a Wall Street trader
e. none of the above

22. Which of the following is the correct approach to forming an optimal complete portfolio?
a. Choose the optimal mix of the risk-free asset and risky portfolio based on risk aversion.
Construct the portfolio opportunity set for risky assets. Back out the weights for the assets in
the risky portfolio and the risk-free asset. Find the tangency portfolio P* on the efficient
frontier.

b. Choose the optimal mix of the risk-free asset and risky portfolio based on risk aversion. Back
out the weights for the assets in the risky portfolio and the risk-free asset. Construct the
portfolio opportunity set for risky assets. Find the tangency portfolio P* on the efficient
frontier.

c. Construct the portfolio opportunity set for risky assets. Choose the optimal mix of the risk-
free asset and risky portfolio based on risk aversion. Back out the weights for the assets in
the risky portfolio and the risk-free asset. Find the tangency portfolio P* on the efficient
frontier.

d. Construct the portfolio opportunity set for risky assets. Find the tangency portfolio P* on the
efficient frontier. Choose the optimal mix of the risk-free asset and risky portfolio based on
risk aversion. Back out the weights for the assets in the risky portfolio and the risk-free asset.

23. What is the risk premium for a risk-free asset that yields 3%?
a. 2%
b. 1%
c. 3%
d. 0%

24. A risky portfolio has an expected return of 11% and a standard deviation of 25%. The risk-free rate is
3%. What fraction (percent) of the complete portfolio should an investor allocate to the risk-free
asset if they have a risk aversion of 2?
a. 70%
b. 30%
c. 36%
d. 64%
 25. Which of the following is a measure of the slope of the security characteristic line?
a. Sharpe ratio
b. Alpha
c. Beta
d. r-squared
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26. Suppose a taxable corporate bond has the same risk as a muni bond but the corporate bond has a
higher yield. Why would anyone invest in the muni bond?
a. Because muni bonds of the same risk are more secure.
b. Every investor would always choose the corporate bond with the higher yield.
c. Because that investor is in a very low tax bracket.
d. Because the corporate bond may have a lower after-tax yield.

27. Which of the following risks is not diversifiable?

a. non-systematic risk
b. idiosyncratic risk
c. total risk
d. systematic risk

28. Suppose you wish to form a portfolio of two assets. Which of the following would minimize the risk of
the portfolio? (Hint: think carefully)
a. A correlation of -1
b. A correlation of 0
c. The tangency portfolio
d. The global minimum variance portfolio
e. None of the above

29. Which of the following is not a way in which financial markets create value?
a. Financial markets offer very high returns for very low risk.
b. Financial markets can partition out risk exposure.
c. Financial markets aggregate information.
d. Financial markets allow participants to shift their consumption timing.
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30. If I am a local firm issuing a corporate bond comparable to a muni bond of the same risk which yields
9%, what is the yield I should offer to cater to individuals with tax rates of 25%?
a. 11.25%
b. 6.75%
c. 12%
d. 9%