1. The risk-free interest rate today is 7%. One year ago, you bought an asset which is risk-free and would pay $100 two years from the date of purchase. The risk-free interest rate on the date of purchase was 10%. You sell the asset today. What is the rate of return (HPR) that you made?

(a) 13% (b) 10% (c) 7% (d) 15%

2. You are given the following information about portfolios of two risky assets, A and B: Weight in A Weight in B Std.dev. of portfolio 0 1 12 0.5 0.5 14 1 0 16 What is the covariance between A and B?

(a) 192%2 (b) 168%2 (c) 224%2 (d) Cannot be determined

3. The correlation between Alcoa (AA) and American Express (AXP) is 0.3. You want to form a portfolio, investing 50% in each stock. What is the variance of your portfolio’s return? You have the following information: AA AXP 10 12 8 16

Expected return Standard deviation of return

(a) 85.76%2 (b) 99.2%2 (c) 121%2 (d) 144%2