1. A - Expected return = wi*returni* = 0.6*12% + 0.3*9% + 0.

1*8% =
10.7%
2. B - Var = wi^2*vari + wi*wj*corre(I,j)*sdi*sdj
SD = [(0.6)2(0.0256) + (0.3)2(0.0196) + (0.1)2(0.0172) + 2(0.60)(0.30)
(0.50)(0.16)(0.14) + 2(0.60)(0.10)(0.38)(0.16)(0.13)+ 2(0.3)(0.1)(0.85)
(0.14)(0.13)]0.5 = [0.017062]1/2 = 13.062%
3. B - To be inefficient, the return must be lower while the variance is higher.
The only case where that relationship exists is with respect to Fund B and
D.
4. B - The Sharpe ratios are as follows: Fund A = (12 5) / 16.00 = 0.44,
Fund B = (9 5) / 14.00 = 0.29, Fund D = (10 5) / 13.42 = 0.37
5. A - The curved line below the minimum-variance portfolio represents all
portfolio combinations that are dominated by other portfolio combinations.
Based on the efficient frontier created by these two funds higher returns at
the same level of risk can be achieved above the minimum-variance
portfolio.
6. B - The beta for fund A is equal to the covariance of fund A and the market
divided by the variance of the market. Therefore, 1.2 = COV(A,Market) /
(0.13)2
Solving for COV(A,Market) = (1.2)(0.13)2 = 0.0203.
7. D - rm = 12.4, rm-rf = 7.9, so rf = 4.5; R = rf + beta (rm-rf) = 4.5 +
1.23*7.9 = 14.217, so Sharpe ratio = (14.217-4.5)/11.6 = 0.837
8. D - Wa = 0.3, Wb = 0.7; Expected return = 10.2%, SD = 10.41%, so
Sharpe ratio = (10.2-4)/10.41 = 0.5956
9. E
10.C
11.A
12.B - Uptown: Market return = -0.1, stock return = 0.4%; AB: Market return =
-0.2, stock return = 0.3%; combined abnormal return = 0.5% + 0.5% =
1%
13.C
14.D
15.D
16.D
17.