Question 1

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Accepted Answer

A) 0.64 
B) 0.27 
C) 0.08 
D) 0.33 
A) 0.64 
B) 0.27 
C) 0.08 
D) 0.33

Question 2

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 3

Which of the following statement(s) is(are) true regarding the variance of a portfolio of two risky securities? I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance.
II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.
III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

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 4

Consider the following probability distribution for stocks C and D:   The expected rates of return of stocks C and D are _____ and _____, respectively.

Accepted Answer

A) 4.4%; 9.5% 
B) 9.5%; 4.4% 
C) 6.3%; 8.7% 
D) 8.7%; 6.2% 
A) 4.4%; 9.5% 
B) 9.5%; 4.4% 
C) 6.3%; 8.7% 
D) 8.7%; 6.2%

Question 5

The efficient frontier of risky assets is

Accepted Answer

A) the portion of the investment opportunity set that lies above the global minimum variance portfolio. 
B) the portion of the investment opportunity set that represents the highest standard deviations. 
C) the portion of the investment opportunity set that includes the portfolios with the lowest standard deviation. 
D) the set of portfolios that have zero standard deviation. 
A) the portion of the investment opportunity set that lies above the global minimum variance portfolio. 
B) the portion of the investment opportunity set that represents the highest standard deviations. 
C) the portion of the investment opportunity set that includes the portfolios with the lowest standard deviation. 
D) the set of portfolios that have zero standard deviation.

Question 6

Security X has expected return of 12% and standard deviation of 18%.Security Y has expected return of 15% and standard deviation of 26%.If the two securities have a correlation coefficient of 0.7, what is their covariance?

Accepted Answer

A) 0.038 
B) 0.070 
C) 0.018 
D) 0.033 
A) 0.038 
B) 0.070 
C) 0.018 
D) 0.033

Question 7

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated.The global-minimum variance portfolio has a standard deviation that is always

Accepted Answer

A) greater than zero. 
B) equal to zero. 
C) equal to the sum of the securities' standard deviations. 
D) equal to -1. 
A) greater than zero. 
B) equal to zero. 
C) equal to the sum of the securities' standard deviations. 
D) equal to -1.

Question 8

Systematic risk is also referred to as

Accepted Answer

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

Question 9

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

Accepted Answer

A) Only portfolio A cannot lie on the efficient frontier. 
B) Only portfolio B cannot lie on the efficient frontier. 
C) Only portfolio C cannot lie on the efficient frontier. 
D) Only portfolio D cannot lie on the efficient frontier. 
A) Only portfolio A cannot lie on the efficient frontier. 
B) Only portfolio B cannot lie on the efficient frontier. 
C) Only portfolio C cannot lie on the efficient frontier. 
D) Only portfolio D cannot lie on the efficient frontier.

Question 10

Consider the following probability distribution for stocks A and B:   The expected rates of return of stocks A and B are _____ and _____, respectively.

Accepted Answer

A) 13.2%; 9% 
B) 14%; 10% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2% 
A) 13.2%; 9% 
B) 14%; 10% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2%

Question 11

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

Accepted Answer

A) 1.5%; 1.9% 
B) 2.2%; 1.2% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1% 
A) 1.5%; 1.9% 
B) 2.2%; 1.2% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1%

Question 12

Consider the following probability distribution for stocks A and B:   The expected rates of return of stocks A and B are _____ and _____, respectively.

Accepted Answer

A) 13.2%; 9% 
B) 13%; 8.4% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2% 
A) 13.2%; 9% 
B) 13%; 8.4% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2%

Question 13

The individual investor's optimal portfolio is designated by

Accepted Answer

A) the point of tangency with the indifference curve and the capital allocation line. 
B) the point of highest reward to variability ratio in the opportunity set. 
C) the point of tangency with the opportunity set and the capital allocation line. 
D) the point of the highest reward to variability ratio in the indifference curve. 
A) the point of tangency with the indifference curve and the capital allocation line. 
B) the point of highest reward to variability ratio in the opportunity set. 
C) the point of tangency with the opportunity set and the capital allocation line. 
D) the point of the highest reward to variability ratio in the indifference curve.

Question 14

The expected return of a portfolio of risky securities

Accepted Answer

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

Question 15

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Accepted Answer

A) 0.64 
B) 0.14 
C) 0.08 
D) 0.35 
A) 0.64 
B) 0.14 
C) 0.08 
D) 0.35

Question 16

Consider the following probability distribution for stocks A and B:   The expected rate of return and standard deviation of the global minimum variance portfolio, G, are __________ and __________, respectively.

Accepted Answer

A) 10.07%; 1.05% 
B) 8.97%; 2.03% 
C) 10.07%; 3.01% 
D) 8.97%; 1.05% 
A) 10.07%; 1.05% 
B) 8.97%; 2.03% 
C) 10.07%; 3.01% 
D) 8.97%; 1.05%

Question 17

Unique risk is also referred to as

Accepted Answer

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

Question 18

The risk that can be diversified away is

Accepted Answer

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

Question 19

Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78, what is their covariance?

Accepted Answer

A) 0.038 
B) 0.049 
C) 0.047 
D) 0.045 
A) 0.038 
B) 0.049 
C) 0.047 
D) 0.045

Question 20

The separation property refers to the conclusion that

Accepted Answer

A) the determination of the best risky portfolio is objective, and the choice of the best complete portfolio is subjective. 
B) the choice of the best complete portfolio is objective, and the determination of the best risky portfolio is objective. 
C) the choice of inputs to be used to determine the efficient frontier is objective, and the choice of the best CAL is subjective. 
D) the determination of the best CAL is objective, and the choice of the inputs to be used to determine the efficient frontier is subjective. 
A) the determination of the best risky portfolio is objective, and the choice of the best complete portfolio is subjective. 
B) the choice of the best complete portfolio is objective, and the determination of the best risky portfolio is objective. 
C) the choice of inputs to be used to determine the efficient frontier is objective, and the choice of the best CAL is subjective. 
D) the determination of the best CAL is objective, and the choice of the inputs to be used to determine the efficient frontier is subjective.

Exam 7: Optimal Risky Portfolios

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Diversifiable risk is also referred to as

Consider the following probability distribution for stocks C and D: The expected rates of return of stocks C and D are _____ and _____, respectively.

The efficient frontier of risky assets is

Security X has expected return of 12% and standard deviation of 18%.Security Y has expected return of 15% and standard deviation of 26%.If the two securities have a correlation coefficient of 0.7, what is their covariance?

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated.The global-minimum variance portfolio has a standard deviation that is always

Systematic risk is also referred to as

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _____ and _____, respectively.

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

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _____ and _____, respectively.

The individual investor's optimal portfolio is designated by

The expected return of a portfolio of risky securities

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Consider the following probability distribution for stocks A and B: The expected rate of return and standard deviation of the global minimum variance portfolio, G, are __________ and __________, respectively.

Unique risk is also referred to as

The risk that can be diversified away is

Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78, what is their covariance?

The separation property refers to the conclusion that

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 C and D: The expected rates of return of stocks C and D are _ and _, respectively.

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _ and _, respectively.

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

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _ and _, respectively.

Consider the following probability distribution for stocks A and B: The expected rate of return and standard deviation of the global minimum variance portfolio, G, are and , respectively.