Question 1

In a two-security minimum variance portfolio where the correlation between securities is greater than -1.0,

Accepted Answer

A) the security with the higher standard deviation will be weighted more heavily. 
B) the security with the higher standard deviation will be weighted less heavily. 
C) the two securities will be equally weighted. 
D) the risk will be zero. 
A) the security with the higher standard deviation will be weighted more heavily. 
B) the security with the higher standard deviation will be weighted less heavily. 
C) the two securities will be equally weighted. 
D) the risk will be zero. B

Question 2

The risk that can be diversified away in a portfolio is referred to as ___________. I) diversifiable risk
II) unique risk
III) systematic risk
IV) firm-specific risk

Accepted Answer

A) I, III, and IV 
B) II, III, and IV 
C) III and IV 
D) I, II, and IV 
A) I, III, and IV 
B) II, III, and IV 
C) III and IV 
D) I, II, and IV D

Question 3

Consider the following probability distribution for stocks A and B:   The standard deviations of stocks A and B are _____ and _____, respectively.

Accepted Answer

A) 1.5%; 1.9% 
B) 2.5%; 1.1% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1% 
A) 1.5%; 1.9% 
B) 2.5%; 1.1% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1% D

Question 4

Efficient portfolios of N risky securities are portfolios that

Accepted Answer

A) are formed with the securities that have the highest rates of return regardless of their standard deviations. 
B) have the highest rates of return for a given level of risk. 
C) are selected from those securities with the lowest standard deviations regardless of their returns. 
D) have the highest risk and rates of return and the highest standard deviations. 
A) are formed with the securities that have the highest rates of return regardless of their standard deviations. 
B) have the highest rates of return for a given level of risk. 
C) are selected from those securities with the lowest standard deviations regardless of their returns. 
D) have the highest risk and rates of return and the highest standard deviations.

Question 5

The risk that cannot be diversified away is

Accepted Answer

A) firm-specific risk. 
B) unique. 
C) nonsystematic risk. 
D) market risk. 
A) firm-specific risk. 
B) unique. 
C) nonsystematic risk. 
D) market risk.

Question 6

Which of the following statement(s) is(are) false regarding the selection of a portfolio from those that lie on the capital allocation line? I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.
II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.
III) Investors choose the portfolio that maximizes their expected utility.

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and II 
A) I only 
B) II only 
C) III only 
D) I and II

Question 7

Other things equal, diversification is most effective when

Accepted Answer

A) securities' returns are uncorrelated. 
B) securities' returns are positively correlated. 
C) securities' returns are high. 
D) securities' returns are negatively correlated. 
A) securities' returns are uncorrelated. 
B) securities' returns are positively correlated. 
C) securities' returns are high. 
D) securities' returns are negatively correlated.

Question 8

The variance of a portfolio of risky securities

Accepted Answer

A) is a weighted sum of the securities' variances. 
B) is the sum of the securities' variances. 
C) is the weighted sum of the securities' variances and covariances. 
D) is the sum of the securities' covariances. 
A) is a weighted sum of the securities' variances. 
B) is the sum of the securities' variances. 
C) is the weighted sum of the securities' variances and covariances. 
D) is the sum of the securities' covariances.

Question 9

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

Accepted Answer

A) the assets have a correlation coefficient less than zero. 
B) the assets have a correlation coefficient equal to zero. 
C) the assets have a correlation coefficient greater than zero. 
D) the assets have a correlation coefficient equal to one. 
A) the assets have a correlation coefficient less than zero. 
B) the assets have a correlation coefficient equal to zero. 
C) the assets have a correlation coefficient greater than zero. 
D) the assets have a correlation coefficient equal to one.

Question 10

Consider the following probability distribution for stocks C and D:   The standard deviations of stocks C and D are _____ and _____, respectively.

Accepted Answer

A) 7.62%; 11.24% 
B) 11.24%; 7.62% 
C) 10.35%; 12.93% 
D) 12.93%; 10.35% 
A) 7.62%; 11.24% 
B) 11.24%; 7.62% 
C) 10.35%; 12.93% 
D) 12.93%; 10.35%

Question 11

Nonsystematic risk is also referred to as

Accepted Answer

A) market risk or diversifiable risk. 
B) firm-specific risk or market risk. 
C) diversifiable risk or market risk. 
D) diversifiable risk or unique risk. 
A) market risk or diversifiable risk. 
B) firm-specific risk or market risk. 
C) diversifiable risk or market risk. 
D) diversifiable risk or unique risk.

Question 12

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

Accepted Answer

A) 0.0. 
B) 1.0. 
C) 0.5. 
D) -1.0. 
A) 0.0. 
B) 1.0. 
C) 0.5. 
D) -1.0.

Question 13

No diversifiable risk is also referred to as

Accepted Answer

A) systematic risk or unique risk. 
B) systematic risk or market risk. 
C) unique risk or market risk. 
D) unique risk or firm-specific risk. 
A) systematic risk or unique risk. 
B) systematic risk or market risk. 
C) unique risk or market risk. 
D) unique risk or firm-specific risk.

Question 14

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the

Accepted Answer

A) risk/reward tradeoff line. 
B) capital allocation line. 
C) efficient frontier. 
D) portfolio opportunity set. 
A) risk/reward tradeoff line. 
B) capital allocation line. 
C) efficient frontier. 
D) portfolio opportunity set.

Question 15

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

Accepted Answer

A) the portfolio standard deviation will be greater than the weighted average of the individual security standard deviations. 
B) the portfolio standard deviation will be less than the weighted average of the individual security standard deviations. 
C) the portfolio standard deviation will be equal to the weighted average of the individual security standard deviations. 
D) the portfolio standard deviation will always be equal to the securities' covariance. 
A) the portfolio standard deviation will be greater than the weighted average of the individual security standard deviations. 
B) the portfolio standard deviation will be less than the weighted average of the individual security standard deviations. 
C) the portfolio standard deviation will be equal to the weighted average of the individual security standard deviations. 
D) the portfolio standard deviation will always be equal to the securities' covariance.

Question 16

The unsystematic risk of a specific security

Accepted Answer

A) is likely to be higher in an increasing market. 
B) results from factors unique to the firm. 
C) depends on market volatility. 
D) cannot be diversified away. 
A) is likely to be higher in an increasing market. 
B) results from factors unique to the firm. 
C) depends on market volatility. 
D) cannot be diversified away.

Question 17

Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Accepted Answer

A) 0.64 
B) 0.39 
C) 0.08 
D) 0.13 
A) 0.64 
B) 0.39 
C) 0.08 
D) 0.13

Question 18

For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?

Accepted Answer

A) +1.00 
B) +0.50 
C) 0.00 
D) -1.00 
A) +1.00 
B) +0.50 
C) 0.00 
D) -1.00

Question 19

The standard deviation of a portfolio of risky securities is

Accepted Answer

A) the square root of the weighted sum of the securities' variances. 
B) the square root of the sum of the securities' variances. 
C) the square root of the weighted sum of the securities' variances and covariances. 
D) the square root of the sum of the securities' covariances. 
A) the square root of the weighted sum of the securities' variances. 
B) the square root of the sum of the securities' variances. 
C) the square root of the weighted sum of the securities' variances and covariances. 
D) the square root of the sum of the securities' covariances.

Question 20

Consider the following probability distribution for stocks A and B:   If you invest 35% of your money in A and 65% in B, what would be your portfolio's expected rate of return and standard deviation?

Accepted Answer

A) 9.9%; 3% 
B) 9.9%; 1.1% 
C) 10%; 1.7% 
D) 10%; 3% 
A) 9.9%; 3% 
B) 9.9%; 1.1% 
C) 10%; 1.7% 
D) 10%; 3%

Exam 7: Optimal Risky Portfolios

In a two-security minimum variance portfolio where the correlation between securities is greater than -1.0,

The risk that can be diversified away in a portfolio is referred to as ___________. I) diversifiable risk II) unique risk III) systematic risk IV) firm-specific risk

Consider the following probability distribution for stocks A and B: The standard deviations of stocks A and B are _____ and _____, respectively.

Efficient portfolios of N risky securities are portfolios that

The risk that cannot be diversified away is

Other things equal, diversification is most effective when

The variance of a portfolio of risky securities

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

Consider the following probability distribution for stocks C and D: The standard deviations of stocks C and D are _____ and _____, respectively.

Nonsystematic risk is also referred to as

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

No diversifiable risk is also referred to as

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

The unsystematic risk of a specific security

Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?

The standard deviation of a portfolio of risky securities is

Consider the following probability distribution for stocks A and B: If you invest 35% of your money in A and 65% in B, what would be your portfolio's expected rate of return and standard deviation?

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Consider the following probability distribution for stocks A and B: The standard deviations of stocks A and B are _ and _, respectively.

Consider the following probability distribution for stocks C and D: The standard deviations of stocks C and D are _ and _, respectively.