Question 1

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. 
E)  investors are separate beings and will, therefore, have different preferences regarding the risk-return tradeoff. 
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. 
E)  investors are separate beings and will, therefore, have different preferences regarding the risk-return tradeoff. A

Question 2

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.15 & 12\%& 6\% \
4 & 0.30 & 14\%& 9\% \
5 & 0.20 & 16\% & 11 \%
\end{array}$
 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% B

Question 3

A portfolio contains 3 stocks with expected returns of 15%, 18%, and 12%, with corresponding weights of 25%, 45%, and 30%, respectively. What is the expected return of the portfolio?

Accepted Answer

A)  13.2% 
B)  14.4% 
C)  15.5% 
D)  17.7% 
A)  13.2% 
B)  14.4% 
C)  15.5% 
D)  17.7% C

Question 4

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text {Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.20 & 12\% & 6\% \
4 & 0.30 & 14\% & 9\% \
5 & 0.20 & 15\%& 8 \%
\end{array}$
 Which of the following portfolio(s) is(are) on the efficient frontier?

Accepted Answer

A)  The portfolio with 20 percent in A and 80 percent in B. 
B)  The portfolio with 15 percent in A and 85 percent in B. 
C)  The portfolio with 26 percent in A and 74 percent in B. 
D)  The portfolio with 10 percent in A and 90 percent in B. 
E)  A and B are both on the efficient frontier. 
A)  The portfolio with 20 percent in A and 80 percent in B. 
B)  The portfolio with 15 percent in A and 85 percent in B. 
C)  The portfolio with 26 percent in A and 74 percent in B. 
D)  The portfolio with 10 percent in A and 90 percent in B. 
E)  A and B are both on the efficient frontier.

Question 5

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A}& \text { Return on Stock E } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 138 & 78 \
3 & 0.20 & 128 & 68 \
4 & 0.30 & 148 & 98 \
5 & 0.20 & 158 & 8 \%
\end{array}$ 
 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 6

As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation?

Accepted Answer

A)  It increases at an increasing rate. 
B)  It increases at a decreasing rate. 
C)  It decreases at an increasing rate. 
D)  It decreases at a decreasing rate. 
E)  It first decreases, then starts to increase as more securities are added. 
A)  It increases at an increasing rate. 
B)  It increases at a decreasing rate. 
C)  It decreases at an increasing rate. 
D)  It decreases at a decreasing rate. 
E)  It first decreases, then starts to increase as more securities are added.

Question 7

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 8

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. 
E)  None of the options are correct. 
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. 
E)  None of the options are correct.

Question 9

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 12% and a standard deviation of 17%. B has an expected rate of return of 9% and a standard deviation of 14%. The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Accepted Answer

A)  9.5% 
B)  10.4% 
C)  10.9% 
D)  9.9% 
A)  9.5% 
B)  10.4% 
C)  10.9% 
D)  9.9%

Question 10

Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$
 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% 
E)  None of the options are correct. 
A)  4.4%; 9.5% 
B)  9.5%; 4.4% 
C)  6.3%; 8.7% 
D)  8.7%; 6.2% 
E)  None of the options are correct.

Question 11

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.15 & 12\%& 6\% \
4 & 0.30 & 14\%& 9\% \
5 & 0.20 & 16\% & 11 \%
\end{array}$

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%

Question 12

Given an optimal risky portfolio with expected return of 13%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Accepted Answer

A)  0.60 
B)  0.14 
C)  0.08 
D)  0.36 
E)  0.31 
A)  0.60 
B)  0.14 
C)  0.08 
D)  0.36 
E)  0.31

Question 13

Nondiversifiable risk is also referred to as

Accepted Answer

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

Question 14

A two-asset portfolio with a standard deviation of zero can be formed 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. 
E)  the assets have a correlation coefficient equal to negative 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. 
E)  the assets have a correlation coefficient equal to negative one.

Question 15

A statistic that measures how the returns of two risky assets move together is:

Accepted Answer

A)  variance. 
B)  standard deviation. 
C)  covariance. 
D)  correlation. 
E)  covariance and correlation. 
A)  variance. 
B)  standard deviation. 
C)  covariance. 
D)  correlation. 
E)  covariance and correlation.

Question 16

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. The weights of A and B in the global minimum variance portfolio are _____ and _____, respectively.

Accepted Answer

A)  0.24; 0.76 
B)  0.50; 0.50 
C)  0.57; 0.43 
D)  0.43; 0.57 
E)  0.76; 0.24 
A)  0.24; 0.76 
B)  0.50; 0.50 
C)  0.57; 0.43 
D)  0.43; 0.57 
E)  0.76; 0.24

Question 17

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 
E)  0.36 
A)  0.64 
B)  0.14 
C)  0.08 
D)  0.35 
E)  0.36

Question 18

Diversifiable risk is also referred to as

Accepted Answer

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

Question 19

Consider two perfectly negatively correlated risky securities, K and L. K has an expected rate of return of 13% and a standard deviation of 21%. L has an expected rate of return of 10% and a standard deviation of 15%. The weights of K and L in the global minimum variance portfolio are _____ and _____, respectively.

Accepted Answer

A)  0.2411; 0.7261 
B)  0.5000; 0.5000 
C)  0.4167; 0.5833 
D)  0.4532; 0.5511 
E)  0.7665; 0.2488 
A)  0.2411; 0.7261 
B)  0.5000; 0.5000 
C)  0.4167; 0.5833 
D)  0.4532; 0.5511 
E)  0.7665; 0.2488

Question 20

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. 
E)  None of the options are correct. 
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. 
E)  None of the options are correct.

Exam 7: Efficient Diversification

The separation property refers to the conclusion that

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A Return on Stock B 1 0.15 8\% 8\% 2 0.20 13\% 7\% 3 0.15 12\% 6\% 4 0.30 14\% 9\% 5 0.20 16\% 11\% The expected rates of return of stocks A and B are _____ and _____, respectively.

A portfolio contains 3 stocks with expected returns of 15%, 18%, and 12%, with corresponding weights of 25%, 45%, and 30%, respectively. What is the expected return of the portfolio?

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A Return on Stock B 1 0.10 10\% 8\% 2 0.20 13\% 7\% 3 0.20 12\% 6\% 4 0.30 14\% 9\% 5 0.20 15\% 8\% Which of the following portfolio(s) is(are) on the efficient frontier?

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A Return on Stock E 1 0.10 10\% 8\% 2 0.20 138 78 3 0.20 128 68 4 0.30 148 98 5 0.20 158 8\% The expected rates of return of stocks A and B are _____ and _____, respectively.

As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation?

The risk that can be diversified away is

The individual investor's optimal portfolio is designated by

Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock D 1 0.30 7\% -9\% 2 0.50 11\% 14\% 3 0.20 -16\% 26\% The expected rates of return of stocks C and D are _____ and _____, respectively.

Given an optimal risky portfolio with expected return of 13%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Nondiversifiable risk is also referred to as

A two-asset portfolio with a standard deviation of zero can be formed when

A statistic that measures how the returns of two risky assets move together is:

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?

Diversifiable risk is also referred to as

The variance of a portfolio of risky securities

The Investment Environment

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

Behavioral 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: State Probability Return on Stock A Return on Stock B 1 0.15 8\% 8\% 2 0.20 13\% 7\% 3 0.15 12\% 6\% 4 0.30 14\% 9\% 5 0.20 16\% 11\% The expected rates of return of stocks A and B are _ and _, respectively.

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A Return on Stock E 1 0.10 10\% 8\% 2 0.20 138 78 3 0.20 128 68 4 0.30 148 98 5 0.20 158 8\% The expected rates of return of stocks A and B are _ and _, respectively.

Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock D 1 0.30 7\% -9\% 2 0.50 11\% 14\% 3 0.20 -16\% 26\% The expected rates of return of stocks C and D are _ and _, respectively.