Question 1

**The S&P 500 index of U.S. stocks has an expected return of 0.10 and a variance of 0.04, and the index of Emerging Market stocks has an expected return of 0.08 and a variance of 0.03. Their correlation is 0.25 and the risk-free rate is 0.03. What is your optimal allocation to the S&P 500 index if you maximize your tradeoff between portfolio expected return and variance, your risk aversion is 3, and you do not face any financial constraints? Answer in decimal form with two decimals (i.e. 20.33% is 0.20).**

1 point

2.

Question 2

**Assume you maximize your tradeoff between your portfolio’s expected return and variance. All else equal, an increase in the volatility of an asset will increase its allocation.**

1 point

True

False

3.

Question 3

**Assume you maximize your tradeoff between your portfolio’s expected return and variance, and you do not face any financial constraints. All else equal, your allocation across risky assets (i.e. how much you allocate to one risky asset versus another risky asset) changes as your risk aversion increases.**

1 point

True

False

4.

Question 4

**Assume you maximize your tradeoff between your portfolio’s expected return and variance. All else equal, you invest more in risky assets when you become less risk averse.**

1 point

True

False

5.

Question 5

**Imposing some weight constraints usually leads to better performing portfolios… (more than one answer may be true)**

1 point

because it limits the impact of estimation errors made on volatilities.

because it limits the impact of estimation errors made on expected returns.

because it increases turnover.

because it prevents one company held in a portfolio from going bankrupt.

6.

Question 6

**A limit on portfolio net leverage…**

1 point

limits the volatility of the portfolio.

prevents any asset from having a negative weight.

limits the amount of trading

limits the sum of portfolio weights.

7.

Question 7

**Which of the following is not a reason for imposing constraints on your portfolio?**

1 point

Preventing a company going bankrupt from having a large impact on a portfolio.

Controlling for estimation errors made when estimating expected returns.

Manage the liquidity of the portfolio.

Regulatory and fiscal reasons.

8.

Question 8

**At maturity, the call option holder has the option to buy the underlying stock.**

1 point

True

False

9.

Question 9

**Which of the following is false? Tactical asset allocation aims to:**

1 point

take advantage of time variations in expected returns due to irrationality.

take advantage of time variations in expected returns due to time-varying risk premiums.

overweigh the stock market compared to its strategic allocation.

mitigate short-term risk.

10.

Question 10

**Buying a put option on the stock market is a way of:**

1 point

protecting oneself from adecrease in the stock market

betting that the stock market will not fall by a lot

benefiting from a sudden increase in the stock market

protecting oneself from a decrease in market volatility

11.

Question 11

**A put option is said to be in-the-money if the underlying asset`s price is below the strike price.**

1 point

True

False

12.

Question 12

**If the underlying price is 100EUR, then a call option with a strike price of 90EUR is said to be out-of-the money.**

1 point

True

False

13.

Question 13

**A put option on a stock with a strike price of 50USD was bought for a price of 5USD. What is the profit or loss if the underlying stock is trading at 40USD at maturity? Express your answer with no decimals (i.e. 20 for a profit of 20USD or -20 for a loss of 20USD).**

1 point

14.

Question 14

**A put option on a stock with a strike price of 50USD was bought for a price of 2USD. What is the profit or loss if the underlying stock is trading at 52USD at maturity? Express your answer with no decimals (i.e. 20 for a profit of 20USD or -20 for a loss of 20USD).**

1 point

15.

Question 15

**Let’s say a long-term bond issued by the French government has an expected return of 0.02 and a volatility of 0.10, and the CAC 40 index of French stocks has an expected return of 0.05 and a volatility of 0.2. Their covariance is 0.002 and the risk-free rate is 0.04. What is your optimal allocation to CAC 40 index if you maximize your tradeoff between portfolio expected return and variance, your risk aversion is 3, and you do not face any financial constraints? Answer in decimal form with two decimals (i.e. 20.33% is 0.20).**

1 point

16.

Question 16

**In your portfolio, you allocated 40% to the Chinese stock market, 80% to the British stock market, -40% to the U.S. stock market, and 20% to the risk-free asset (i.e. you borrowed money). What is your net leverage (using only risky assets)? Answer in decimal form with one decimal (i.e. 20.33% is 0.2).**

1 point

17.

Question 17

**All else equal, an increase in expected returns of two risky assets will decrease the volatility of a portfolio containing these two assets.**

1 point

True

False

18.

Question 18

**Which of the following is not a risk factor used in asset pricing models, as discussed in this module?**

1 point

the carry factor

the dividend yield factor

the value factor

the market portfolio

19.

Question 19

**Why is a good asset pricing model important for investment management?**

1 point

it says which risk factors are compensated with average returns

it says which portfolio constraints to use

all of the above

it says that only the market portfolio has positive returns on average

20.

Question 20

**A currency forward is a financial instrument… (multiple answers may be true).**

1 point

whose price depends on the difference between the exchange rate and the strike price

that allows us to buy or sell a currency at a predetermined exchange rate

whose price depends on whether it is a call or a put option

that gives the option to buy one currency