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 variances of stocks A and B are _____ and _____, respectively.

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%

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 coefficient of correlation between A and B is

A) 0.474. B) 0.612. C) 0.590. D) 1.206. A) 0.474. B) 0.612. C) 0.590. D) 1.206.

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? \(\begin{array}{ccc} \text { Portfolio } & \text { Expected Return } & \text { Standard Deviation } \\ \text { A } & 10\% & 12\% \\ \mathrm{B} & 5\%& 7\% \\ \mathrm{C} & 15\% & 20\% \\ \mathrm{D} & 12\% & 25 \% \end{array}\)

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. E) Cannot be determined from the information given. 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. E) Cannot be determined from the information given.

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 standard deviations of stocks A and B are _____ and _____, respectively.

A) 1.56%; 1.99% B) 2.45%; 1.66% C) 3.22%; 2.01% D) 1.54%; 1.11% A) 1.56%; 1.99% B) 2.45%; 1.66% C) 3.22%; 2.01% D) 1.54%; 1.11%

Exam 7: Efficient Diversification

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.

(Multiple Choice)

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Question 61

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 variances of stocks A and B are _ and _, respectively.

(Multiple Choice)

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Question 62

In words, the covariance considers the probability of each scenario happening and the interaction between

(Multiple Choice)

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Question 63

A portfolio contains 3 stocks with expected returns of 12%, 15%, and 9%, with corresponding weights of 30%, 35%, and 35%, respectively. What is the expected return of the portfolio?

(Multiple Choice)

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Question 64

Other things equal, diversification is most effective when

(Multiple Choice)

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Question 65

The expected return of a portfolio of risky securities

(Multiple Choice)

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Question 66

Which statement about portfolio diversification is correct?

(Multiple Choice)

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Question 67

When borrowing and lending at a risk-free rate are allowed, which capital allocation line (CAL) should the investor choose to combine with the efficient frontier?I) The one with the highest reward-to-variability ratio.II) The one that will maximize his utility.III) The one with the steepest slope.IV) The one with the lowest slope.

(Multiple Choice)

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Question 68

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 coefficient of correlation between A and B is

(Multiple Choice)

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Question 69

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

(Multiple Choice)

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Question 70

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Return Standard Deviation A 10\% 12\% 5\% 7\% 15\% 20\% 12\% 25\%

(Multiple Choice)

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Question 71

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

(Multiple Choice)

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Question 72

The risk that cannot be diversified away is

(Multiple Choice)

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Question 73

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must

(Multiple Choice)

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Question 74

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

(Multiple Choice)

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Question 75

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 standard deviations of stocks A and B are _ and _, respectively.

(Multiple Choice)

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Question 76

The efficient frontier of risky assets is

(Multiple Choice)

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Question 77

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.

(Multiple Choice)

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Question 78

Security X has expected return of 9% and standard deviation of 18%. Security Y has expected return of 12% and standard deviation of 21%. If the two securities have a correlation coefficient of −0.4, what is their covariance?

(Multiple Choice)

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Question 79

The measure of risk in a Markowitz efficient frontier is

(Multiple Choice)

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Question 80

Exam 7: Efficient Diversification

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 variances of stocks A and B are _____ and _____, respectively.

In words, the covariance considers the probability of each scenario happening and the interaction between

A portfolio contains 3 stocks with expected returns of 12%, 15%, and 9%, with corresponding weights of 30%, 35%, and 35%, respectively. What is the expected return of the portfolio?

Other things equal, diversification is most effective when

The expected return of a portfolio of risky securities

Which statement about portfolio diversification is correct?

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 coefficient of correlation between A and B is

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

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Return Standard Deviation A 10\% 12\% 5\% 7\% 15\% 20\% 12\% 25\%

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

The risk that cannot be diversified away is

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must

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

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 standard deviations of stocks A and B are _____ and _____, respectively.

The efficient frontier of risky assets is

Security X has expected return of 9% and standard deviation of 18%. Security Y has expected return of 12% and standard deviation of 21%. If the two securities have a correlation coefficient of −0.4, what is their covariance?

The measure of risk in a Markowitz efficient frontier is

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

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Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

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The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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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 variances 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 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 standard deviations of stocks A and B are _ and _, respectively.