Data analysis

Fin 31 Midterm Exam

Fall 2015

Name:_______________________

Instructions:

  1. Answer ANY THREE questions.
  2. Show all work where required. The final answer carries very little weight in determining your score for each problem.

Use the following data for questions 1 through 4.

Data analysis on several securities has revealed the following statistics;

, , , , , and . “F” is a riskless asset.

  1. (25 points)
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  2. Compute the level of systematic risk for A, , and state whether A is more risky than the market or less risky than the market (or the same). (5 points)
  3. Use the capital asset pricing model to determine if A is correctly priced. State whether there is an arbitrage opportunity available. If so, what is the amount of Jensen’s Alpha? (5 points)
  4. Construct an arbitrage portfolio and show the level of return. (15 points)
  5. (25 points)
  6. Compute Sharpe’s Index for “A” and for the market portfolio, “M.” Which of the two assets would a risk-averse investor prefer? Explain. (10 points)
  7. Compute Treynor’s Index for “A” and the market portfolio, “M.” Which of the two assets would a risk-averse investor prefer? Explain. (10 points)
  8. How does the correlation between A and M explain the difference between the two indexes? Explain. (5 points)
  9. (25 points)
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In question #1 the security market line was used to determine whether “A” was under-priced or overpriced. This question uses the capital market line.

  1. Graph the capital market line in the space below. Hint: You will have to find the slope of the CML in order to do this. (8 points)
  2. Show whether “A” is correctly priced according to the capital market line. (8 points)
  3. Explain the difference between the security market line and the capital market line in terms of risk and return. Will the capital market line call for a higher expected return than the security market line? (5 points)
  4. State the three forms of the EMH and describe an anomaly of one of the forms. (4 points)
  5. Compute the following:
  6. Compute the expected returns and standard deviations of portfolio P, formed by combining A and M using the weights below. (15 points)

Use the equations,

and

1.0
0.75
0.5
0.25
0.00

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  1. Graph the standard deviation and expected return in the space below. Put standard deviation on the horizontal axis and expected return on the vertical axis. (5 points)
  2. Would anyone ever invest in M? Explain in the context of risk and return. (5 points)

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