Question 1

The correlation coefficient and the covariance are measures of the extent to which two random variables move together.

Accepted Answer

A) True 
 B)False

Question 2

Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?

Accepted Answer

A) 1.26 
B) 0.7937 
C) 0.2142 
D) 0.1111 
E) 0.44 
A) 1.26 
B) 0.7937 
C) 0.2142 
D) 0.1111 
E) 0.44

Question 3

Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

Accepted Answer

A) 300 
B) 461.54 
C) 261.54 
D) 195 
E) 200 
A) 300 
B) 461.54 
C) 261.54 
D) 195 
E) 200

Question 4

As the correlation coefficient between two assets decreases, the shape of the efficient frontier

Accepted Answer

A) approaches a horizontal straight line. 
B) bends out. 
C) bends in. 
D) approaches a vertical straight line. 
E) none of the above. 
A) approaches a horizontal straight line. 
B) bends out. 
C) bends in. 
D) approaches a vertical straight line. 
E) none of the above.

Question 5

Exhibit 7.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 10 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 8 \% \
\left( \sigma _ { \mathrm { A } } \right) = 6 \% & \left( \sigma _ { \mathrm { B } } \right) = 5 \% \
\mathrm {~W} _ { \mathrm { A } } = 0.3 & \mathrm {~W} _ { \mathrm { B } } = 0.7 \
\mathrm { CO } V _ { \mathrm { A,B } } = 0.0008
\end{array}$$
-Refer to Exhibit 7.4. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation ($\sigma$i), covariance (COVi,j), and asset weight (Wi) are as shown above?

Accepted Answer

A) 8.6% 
B) 8.1% 
C) 9.3% 
D) 10.2% 
E) 11.6% 
A) 8.6% 
B) 8.1% 
C) 9.3% 
D) 10.2% 
E) 11.6%

Question 6

Exhibit 7.14
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed. $$\begin{array} { c c c } 
\text { Stock } & \text { Expected Return } & \text { Standard Deviation } \
\hline \text { A } & 20 \% & 25 \% \
\text { B } & 15 \% & 19 \%
\end{array}$$
-Refer to Exhibit 7.14. What is the expected return of the stock A and B portfolio?

Accepted Answer

A) 17.0% 
B) 17.5% 
C) 18.0% 
D) 18.5% 
E) 19.0% 
A) 17.0% 
B) 17.5% 
C) 18.0% 
D) 18.5% 
E) 19.0%

Question 7

The expected return and standard deviation of a portfolio of risky assets is equal to the weighted average of the individual asset's expected returns and standard deviation.

Accepted Answer

A) True 
 B)False

Question 8

A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification?

Accepted Answer

A) 0.0 
B) 0.25 
C) -0.25 
D) -0.75 
E) 1.0 
A) 0.0 
B) 0.25 
C) -0.25 
D) -0.75 
E) 1.0

Question 9

Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the

Accepted Answer

A) Efficient portfolio. 
B) Utility curve. 
C) Efficient frontier. 
D) Last frontier. 
E) Capital asset pricing model. 
A) Efficient portfolio. 
B) Utility curve. 
C) Efficient frontier. 
D) Last frontier. 
E) Capital asset pricing model.

Question 10

Exhibit 7.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 25 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 15 \% \
\left( \sigma _ { \mathrm { A } } \right) = 18 \% & \left( \sigma _ { \mathrm { B } } \right) = 11 \% \
W _ { \mathrm { A } } = 0.75 & W _ { \mathrm { B } } = 0.25 \
\mathrm { CO } V _ { \mathrm { AB } _ { \mathrm { B } } } = - 0.0009
\end{array}$$
-Refer to Exhibit 7.2. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation ($\sigma$i), covariance (COVi,j), and asset weight (Wi) are as shown above?

Accepted Answer

A) 18.64% 
B) 20.0% 
C) 22.5% 
D) 13.65% 
E) 11% 
A) 18.64% 
B) 20.0% 
C) 22.5% 
D) 13.65% 
E) 11%

Question 11

Assuming that everyone agrees on the efficient frontier (given a set of costs), there would be consensus that the optimal portfolio on the frontier would be where the ratio of return per unit of risk was greatest.

Accepted Answer

A) True 
 B)False

Question 12

Exhibit 7.14
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed. $$\begin{array} { c c c } 
\text { Stock } & \text { Expected Return } & \text { Standard Deviation } \
\hline \text { A } & 20 \% & 25 \% \
\text { B } & 15 \% & 19 \%
\end{array}$$
-Refer to Exhibit 7.14. What percentage of stock A should be invested to obtain the minimum risk portfolio that contains stock A and B?

Accepted Answer

A) 35% 
B) 42% 
C) 58% 
D) 65% 
E) 72% 
A) 35% 
B) 42% 
C) 58% 
D) 65% 
E) 72%

Question 13

Exhibit 7.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 18 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 13 \% \
\left( \sigma _ { \mathrm { A } } \right) = 7 \% & \left( \sigma _ { \mathrm { B } } \right) = 6 \% \
W _ { \mathrm { A } } = 0.3 & W _ { \mathrm { B } } = 0.7 \
\mathrm { COV } V _ { \mathrm { A,B } } = 0.0011
\end{array}$$
-Refer to Exhibit 7.9. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation ($\sigma$i), covariance (COVi,j), and asset weight (Wi) are as shown above?

Accepted Answer

A) 10.10% 
B) 11.60% 
C) 13.88% 
D) 14.50% 
E) 15.37% 
A) 10.10% 
B) 11.60% 
C) 13.88% 
D) 14.50% 
E) 15.37%

Question 14

Prior to the work of Markowitz in the late 1950's and early 1960's, portfolio managers did not have a well-developed, quantitative means of measuring risk.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 7.16
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Based on the economic outlook for the industry a financial analyst covering Top Choice Corporation has determined the following three possible returns given three different states of the economy over the next period. $$\begin{array} { c c } 
\text { Probability } & \text { Return } \
\hline 0.25 & 0.02 \
0.50 & 0.14 \
0.25 & 0.30
\end{array}$$
-Refer to Exhibit 7.16. What is the expected return for Top Choice Corporation?

Accepted Answer

A) 5.2% 
B) 10.4% 
C) 13.7% 
D) 15.0% 
E) 17.6% 
A) 5.2% 
B) 10.4% 
C) 13.7% 
D) 15.0% 
E) 17.6%

Question 16

Exhibit 7.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 10 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 15 \% \
\left( \sigma _ { \mathrm { A } } \right) = 8 \% & \left( \sigma _ { \mathrm { B } } \right) = 9.5 \% \
W _ { \mathrm { A } } = 0.25 & W _ { \mathrm { B } } = 0.75 \
\operatorname { Cov } _ { \mathrm { A } B } = 0.006
\end{array}$$
-Refer to Exhibit 7.1. What is the standard deviation of this portfolio?

Accepted Answer

A) 8.79% 
B) 13.75% 
C) 12.5% 
D) 7.72% 
E) 5.64% 
A) 8.79% 
B) 13.75% 
C) 12.5% 
D) 7.72% 
E) 5.64%

Question 17

What is the expected return of the three stock portfolio described below? $$\begin{array} { l c c } 
\text { Common Stock } & \text { Market Value } & \text { Expected Return } \
\hline \text { Xerox } & 125,000 & 8 \% \
\text { Yelcon } & 250,000 & 25 \% \
\text { Zwiebal } & 175,000 & 16 \%
\end{array}$$

Accepted Answer

A) 18.27% 
B) 14.33% 
C) 16.33% 
D) 12.72% 
E) 16.45% 
A) 18.27% 
B) 14.33% 
C) 16.33% 
D) 12.72% 
E) 16.45%

Question 18

In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would

Accepted Answer

A) Decrease. 
B) Remain constant. 
C) Increase. 
D) Fluctuate positively and negatively. 
E) Be a negative value. 
A) Decrease. 
B) Remain constant. 
C) Increase. 
D) Fluctuate positively and negatively. 
E) Be a negative value.

Question 19

Exhibit 7.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 25 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 15 \% \
\left( \sigma _ { \mathrm { A } } \right) = 18 \% & \left( \sigma _ { \mathrm { B } } \right) = 11 \% \
W _ { \mathrm { A } } = 0.75 & W _ { \mathrm { B } } = 0.25 \
\mathrm { CO } V _ { \mathrm { AB } _ { \mathrm { B } } } = - 0.0009
\end{array}$$
-Refer to Exhibit 7.2. What is the standard deviation of this portfolio?

Accepted Answer

A) 5.45% 
B) 18.64% 
C) 20.0% 
D) 22.5% 
E) 13.65% 
A) 5.45% 
B) 18.64% 
C) 20.0% 
D) 22.5% 
E) 13.65%

Question 20

The combination of two assets that are completely negatively correlated provides maximum returns.

Accepted Answer

A) True 
 B)False

The correlation coefficient and the covariance are measures of the extent to which two random variables move together.

Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?

Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

As the correlation coefficient between two assets decreases, the shape of the efficient frontier

The expected return and standard deviation of a portfolio of risky assets is equal to the weighted average of the individual asset's expected returns and standard deviation.

A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification?

Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the

Assuming that everyone agrees on the efficient frontier (given a set of costs), there would be consensus that the optimal portfolio on the frontier would be where the ratio of return per unit of risk was greatest.

Prior to the work of Markowitz in the late 1950's and early 1960's, portfolio managers did not have a well-developed, quantitative means of measuring risk.

Exhibit 7.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset () Asset () =10\% =15\% =8\% =9.5\% =0.25 =0.75 =0.006 -Refer to Exhibit 7.1. What is the standard deviation of this portfolio?

What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return Xerox 125,000 8\% Yelcon 250,000 25\% Zwiebal 175,000 16\%

In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would

Exhibit 7.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset () Asset () =25\% =15\% =18\% =11\% =0.75 =0.25 =-0.0009 -Refer to Exhibit 7.2. What is the standard deviation of this portfolio?

The combination of two assets that are completely negatively correlated provides maximum returns.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 7: An Introduction to Portfolio Management

The correlation coefficient and the covariance are measures of the extent to which two random variables move together.

Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?

Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

As the correlation coefficient between two assets decreases, the shape of the efficient frontier

The expected return and standard deviation of a portfolio of risky assets is equal to the weighted average of the individual asset's expected returns and standard deviation.

A portfolio manager is considering adding another security to his portfolio. The correlations of the 5 alternatives available are listed below. Which security would enable the highest level of risk diversification?

Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the

Assuming that everyone agrees on the efficient frontier (given a set of costs), there would be consensus that the optimal portfolio on the frontier would be where the ratio of return per unit of risk was greatest.

Prior to the work of Markowitz in the late 1950's and early 1960's, portfolio managers did not have a well-developed, quantitative means of measuring risk.

Exhibit 7.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset () Asset () =10\% =15\% =8\% =9.5\% =0.25 =0.75 =0.006 -Refer to Exhibit 7.1. What is the standard deviation of this portfolio?

What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return Xerox 125,000 8\% Yelcon 250,000 25\% Zwiebal 175,000 16\%

In a two stock portfolio, if the correlation coefficient between two stocks were to decrease over time, everything else remaining constant, the portfolio's risk would

Exhibit 7.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset () Asset () =25\% =15\% =18\% =11\% =0.75 =0.25 =-0.0009 -Refer to Exhibit 7.2. What is the standard deviation of this portfolio?

The combination of two assets that are completely negatively correlated provides maximum returns.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters