Question

10. You have researched information on 3 mutual funds. If the risk-free rate is currently 5.5%, which one of these
funds has managed the best risk-adjusted performance?

Fund Q:
Average annual return: 8.21%
Standard deviation: 7.00%
Beta coefficient: 0.921
Fund R:
Average annual return: 11.55%
Standard deviation: 13.52%
Beta coefficient: 1.100
Fund S:
Average annual return: 12.00%
Standard deviation: 16.05%
Beta coefficient: 1.825
A. Fund S, because it has the highest Treynor ratio
B. Fund R, because it has the highest Sharpe ratio
C. Fund S, because it has the highest rate of return
D. Fund Q, because it has the lowest standard deviation

11. Based on the following information, calculate the expected rate of return for Softco Corporation.
Stock’s beta: 0.80
Forecasted market rate of return: 15%
Risk-free rate of return: 6.5%
A. 6.80%
B. 8.50%
C. 13.30%
D. 17.20%

12. You have determined Stock A has a beta of +1.56, and the market is expected to decline 10% over the next
year. Using security market line analysis, calculate the percentage you expect the return of Stock A to rise or
fall over the next year.
A. Fall by 1.56%
B. Fall by 15.6%
C. Rise by 1.56%
D. Rise by 156%

13. Consider the following information regarding 2 possible investments: Stocks J and K.
Stock J:
Expected return: 11.5%
Standard deviation: 8%
Stock K:
Expected return: 8.2%
Standard deviation: 6%

Identify which of these investments you would prefer and why.
A. Stock K, because it has the least risk
B. Stock J, because it has the highest expected return
C. Stock J, because it has the lowest coefficient of variation
D. Stock K, because it has the highest coefficient of variation

14. A call option with an exercise price of $105 is selling in the open market for $4.25 when the market price of
the underlying stock is $102. Calculate the intrinsic value of this option.
A. –$3.00
B. $0
C. $3.00
D. $4.25

15. Angela purchased a corporate bond currently selling for $925 in the secondary market. The bond has a coupon
rate of 7.75% and matures in 12 years. Calculate the yield to maturity on this bond.
A. 4.39%
B. 8.49%
C. 8.77%
D. 15.50%

Answer 1

Question 10:

Answer : B i.e Fund R, because it has the highest Sharpe ratio

The highest rate of return is not a true measure as it doesn't take into account the risk taken by the investor.

The Treynor Ratio - is a risk/return measure that allows investors to adjust a portfolio's returns for systematic risk. A higher Treynor ratio result means a portfolio is a more suitable investment

Calculated using the formulae = (Portfolio return - Risk free rate) / Beta

Fund Q : (8.21% -5.55%)/0.921 = 0.029

Fund R: (11.55% - 5.55%)/1.100 = 0.055

Fund S: (12.0% - 5.55%)/1.825 = 0.035

The Sharpe Ratio - is the average return earned in excess of the risk-free rate per unit of volatility or total risk. A higher Sharpe ratio result means a portfolio is a more suitable investment

Calculated using the formulae = (Portfolio return - Risk free rate) / Standard Deviation of portfolio's excess return

Fund Q : (8.21% -5.55%)/7% = 0.38

Fund R: (11.55% - 5.55%)/13.52% = 0.44

Fund S: (12.0% - 5.55%)/16.05% = 0.40

Fund R has the highest Treynor and Sharpe Ratio -Hence a better option