Question 1

What is the standard deviation of the returns on this stock?
$$\begin{array} { l c c } 
\text { State of the Economy } & \text { Erobability } & E ( R ) \
\text { Boom } & .30 & 7.5\% \
\text { Normal } & .70 & 21.0\%
\end{array}$$

Accepted Answer

A) 3.33% 
B) 4.62% 
C) 5.01% 
D) 5.77% 
E) 6.19% 
A) 3.33% 
B) 4.62% 
C) 5.01% 
D) 5.77% 
E) 6.19% E

Question 2

If two assets have a zero correlation, their returns will:

Accepted Answer

A) always move in the same direction by the same amount. 
B) always move in the same direction but not necessarily by the same amount. 
C) move randomly and independently of each other. 
D) always move in opposite directions but not necessarily by the same amount. 
E) always move in opposite directions by the same amount. 
A) always move in the same direction by the same amount. 
B) always move in the same direction but not necessarily by the same amount. 
C) move randomly and independently of each other. 
D) always move in opposite directions but not necessarily by the same amount. 
E) always move in opposite directions by the same amount. C

Question 3

Travis has a portfolio consisting of two stocks, A and B, which is valued at $23,932. Stock A is worth $13,230. What is the portfolio weight of Stock B?

Accepted Answer

A) .428 
B) .443 
C) .447 
D) .453 
E) .461 
A) .428 
B) .443 
C) .447 
D) .453 
E) .461 C

Question 4

You have a portfolio which is comprised of 30% of Stock A and 70% of Stock B. What is the portfolio standard deviation?
$\begin{array}{lllr}
\text { State of the Economy } & \text { Probability } &\text {E(R)}_{A}&\text { E(R)}_{B}\
&&30\%&70\%\
\
\text { Boom }&.15&20\%&14\%\
\text { Normal } & .75 & 11\% & 9 \% \
\text { Recegsion } & .10& -23 \% & -5 \%
\end{array}$

Accepted Answer

A) 4.00% 
B) 5.56% 
C) 6.68% 
D) 6.82% 
E) 7.47% 
A) 4.00% 
B) 5.56% 
C) 6.68% 
D) 6.82% 
E) 7.47%

Question 5

You have a portfolio that is comprised of 40% of Stock A and 60% of Stock B. What is the variance of the portfolio?
$\begin{array}{lllr}
\text { State of the Economy } & \text { Probability } &\text {E(R)}_{A}&\text { E(R)}_{B}\
&&40\%&60\%\
\
\text { Normal } & .7 & 12\% & 14 \% \
\text { Recegsion } & .3 & -7 \% & -10 \%
\end{array}$

Accepted Answer

A) 101.64% 
B) 102.13% 
C) 106.84% 
D) 107.15% 
E) 108.93% 
A) 101.64% 
B) 102.13% 
C) 106.84% 
D) 107.15% 
E) 108.93%

Question 6

Where does the minimum variance portfolio lie in respect to the investment opportunity set?

Accepted Answer

A) lowest point 
B) highest point 
C) most leftward point 
D) most rightward point 
E) exact center 
A) lowest point 
B) highest point 
C) most leftward point 
D) most rightward point 
E) exact center

Question 7

What is the variance of the returns on a security given the following information?
$\begin{array}{lrr}
\text { state of the Economy}&\text { Probabllity}&\text { Rate of}\
&\text {of State of Economy}&\text {Return if}\
&&\text {State Occurs}\
\text { Boom } & .20 & 16 \% \
\text { Normal } & .50 & 8 \% \
\text { Recession } & .30 & -8 \%
\end{array}$

Accepted Answer

A) 79.36% 
B) 83.35% 
C) 87.73% 
D) 89.23% 
E) 90.98% 
A) 79.36% 
B) 83.35% 
C) 87.73% 
D) 89.23% 
E) 90.98%

Question 8

Stock A has a standard deviation of 25% per year and Stock B has a standard deviation of 20% per year. The correlation between Stock A and Stock B is .30. You have a portfolio of these two stocks wherein Stock B has a portfolio weight of 40%. What is your portfolio variance?

Accepted Answer

A) .03022 
B) .03156 
C) .03239 
D) .03610 
E) .03304 
A) .03022 
B) .03156 
C) .03239 
D) .03610 
E) .03304

Question 9

Tall Stand Timber stock has an expected return of 8.9%. What is the risk-free rate if the risk premium on the stock is 3.6%?

Accepted Answer

A) 4.70% 
B) 5.30% 
C) 5.60% 
D) 6.50% 
E) 12.5% 
A) 4.70% 
B) 5.30% 
C) 5.60% 
D) 6.50% 
E) 12.5%

Question 10

A portfolio consists of the following securities. What is the portfolio weight of Stock A?
$$\begin{array} { c c c } 
\text { Stock } & \text { \#Shares } & \text { PEg } \
\text { A } & 200 & \$ 48 \
\text { E } & 100 & \$ 33 \
\text { C } & 250 & \$ 21
\end{array}$$

Accepted Answer

A) .336 
B) .389 
C) .445 
D) .451 
E) .529 
A) .336 
B) .389 
C) .445 
D) .451 
E) .529

Question 11

Terry has a portfolio comprised of two individual securities. Which one of the following computations that he might do is NOT a weighted average?

Accepted Answer

A) correlation between the securities 
B) individual security expected return 
C) portfolio expected return 
D) portfolio variance 
E) portfolio beta 
A) correlation between the securities 
B) individual security expected return 
C) portfolio expected return 
D) portfolio variance 
E) portfolio beta

Question 12

A group of stocks and bonds held by an investor is called which one of the following?

Accepted Answer

A) weights 
B) grouping 
C) basket 
D) portfolio 
E) bundle 
A) weights 
B) grouping 
C) basket 
D) portfolio 
E) bundle

Question 13

What is the variance of the returns on a security given the following information?
$\begin{array}{lcc}
\text { State of the Economy } & \text { Probability of } & \text { Rate of Return if } \
& \text { State of Economy } & \text { state occurs }\
\text { Boom } & .05 & 27 \% \
\text { Normal } & .30 & 15 \% \
\text { Recession } & .65 & -22 \%
\end{array}$

Accepted Answer

A) 239.77% 
B) 284.05% 
C) 321.16% 
D) 347.15% 
E) 362.98% 
A) 239.77% 
B) 284.05% 
C) 321.16% 
D) 347.15% 
E) 362.98%

Question 14

Which one of the following statements about efficient portfolios is correct?

Accepted Answer

A) Any efficient portfolio will lie below the minimum variance portfolio when the expected portfolio return is plotted against the portfolio standard deviation. 
B) An efficient portfolio will have the lowest standard deviation of any portfolio consisting of the same two securities. 
C) There are multiple efficient portfolios that can be constructed using the same two securities. 
D) Any portfolio mix consisting of only two securities will be an efficient portfolio. 
E) There is only one efficient portfolio that can be constructed using two securities. 
A) Any efficient portfolio will lie below the minimum variance portfolio when the expected portfolio return is plotted against the portfolio standard deviation. 
B) An efficient portfolio will have the lowest standard deviation of any portfolio consisting of the same two securities. 
C) There are multiple efficient portfolios that can be constructed using the same two securities. 
D) Any portfolio mix consisting of only two securities will be an efficient portfolio. 
E) There is only one efficient portfolio that can be constructed using two securities.

Question 15

You have a portfolio which is comprised of 70% of Stock A and 30% of Stock B. What is the expected return on this portfolio?
$\begin{array}{lrrr}
\text { State of the Economy } & \text { Probability } & \text { E(R)}_{A}& \text {  E(R)}_{B}\
\text { Weight } & &70 \% & 30 \% \
\
\text { Boom } & .2 & 20 \% & 14\% \
\text { Normal } & .6 & 12 \% & 8 \% \
\text { Recession } & .2 & -8 \% & 5\%
\end{array}$

Accepted Answer

A) 9.30% 
B) 9.58% 
C) 10.03% 
D) 11.79% 
E) 12.40% 
A) 9.30% 
B) 9.58% 
C) 10.03% 
D) 11.79% 
E) 12.40%

Question 16

You combine a set of assets using different weights such that you produce the following results.
$\begin{array}{lcc}
\text { Portfolio }&\text {Expected return}&\text {standard deviatior }\
\text { A } & 98 & 11 \% \
\text { B } & 14 & 16 \
\text { C } & 12 & 13 \
\text { D } & 7 & 8 \
\text {E} & 11 & 14
\end{array}$
Which one of these portfolios cannot be a Markowitz efficient portfolio?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
E) E 
A) A 
B) B 
C) C 
D) D 
E) E

Question 17

What is the expected return on this stock given the following information?
$\begin{array}{lcr}
\text { State of the Economy } & \text { Probability } & E(R) \
\text { Boom } & .4 & 15\% \
\text { Recession } & .6 & -20\%
\end{array}$

Accepted Answer

A) 8.07% 
B) 7.69% 
C) 6.00% 
D) 5.70% 
E) 5.20% 
A) 8.07% 
B) 7.69% 
C) 6.00% 
D) 5.70% 
E) 5.20%

Question 18

You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5%, regardless of the economic state. Given this, what must be value of the portfolio's variance be?

Accepted Answer

A) negative, but not −1 
B) −1.0 
C) 0 
D) 1.0 
E) positive, but not +1 
A) negative, but not −1 
B) −1.0 
C) 0 
D) 1.0 
E) positive, but not +1

Question 19

What is the standard deviation of a security that has the following expected returns?
$\begin{array}{lcc}
\text { State of the Economy } & \text { Probability of } & \text { Rate of Return if } \
& \text { State of Economy } & \text { state occurs }\
\text { Boom } & .10 & 19 \% \
\text { Normal } & .75& 13 \% \
\text { Recession } & .15 & -7 \%
\end{array}$

Accepted Answer

A) 7.48% 
B) 7.61% 
C) 7.67% 
D) 7.82% 
E) 7.91% 
A) 7.48% 
B) 7.61% 
C) 7.67% 
D) 7.82% 
E) 7.91%

Question 20

If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:

Accepted Answer

A) zero. 
B) the risk-free rate. 
C) the market rate. 
D) the market rate minus the risk-free rate. 
E) the risk-free rate plus one-half the market rate. 
A) zero. 
B) the risk-free rate. 
C) the market rate. 
D) the market rate minus the risk-free rate. 
E) the risk-free rate plus one-half the market rate.

Exam 11: Diversification and Risky Asset Allocation

What is the standard deviation of the returns on this stock? State of the Economy Erobability E(R) Boom .30 7.5\% Normal .70 21.0\%

If two assets have a zero correlation, their returns will:

Travis has a portfolio consisting of two stocks, A and B, which is valued at $23,932. Stock A is worth $13,230. What is the portfolio weight of Stock B?

You have a portfolio which is comprised of 30% of Stock A and 70% of Stock B. What is the portfolio standard deviation? State of the Economy Probability 30\% 70\% Boom .15 20\% 14\% Normal .75 11\% 9\% Recegsion .10 -23\% -5\%

You have a portfolio that is comprised of 40% of Stock A and 60% of Stock B. What is the variance of the portfolio? State of the Economy Probability 40\% 60\% Normal .7 12\% 14\% Recegsion .3 -7\% -10\%

Where does the minimum variance portfolio lie in respect to the investment opportunity set?

What is the variance of the returns on a security given the following information? state of the Economy Probabllity Rate of of State of Economy Return if State Occurs Boom .20 16\% Normal .50 8\% Recession .30 -8\%

Stock A has a standard deviation of 25% per year and Stock B has a standard deviation of 20% per year. The correlation between Stock A and Stock B is .30. You have a portfolio of these two stocks wherein Stock B has a portfolio weight of 40%. What is your portfolio variance?

Tall Stand Timber stock has an expected return of 8.9%. What is the risk-free rate if the risk premium on the stock is 3.6%?

A portfolio consists of the following securities. What is the portfolio weight of Stock A? Stock \#Shares PEg A 200 \ 48 E 100 \ 33 C 250 \ 21

Terry has a portfolio comprised of two individual securities. Which one of the following computations that he might do is NOT a weighted average?

A group of stocks and bonds held by an investor is called which one of the following?

What is the variance of the returns on a security given the following information? State of the Economy Probability of Rate of Return if State of Economy state occurs Boom .05 27\% Normal .30 15\% Recession .65 -22\%

Which one of the following statements about efficient portfolios is correct?

You have a portfolio which is comprised of 70% of Stock A and 30% of Stock B. What is the expected return on this portfolio? State of the Economy Probability Weight 70\% 30\% Boom .2 20\% 14\% Normal .6 12\% 8\% Recession .2 -8\% 5\%

You combine a set of assets using different weights such that you produce the following results. Portfolio Expected return standard deviatior A 98 11\% B 14 16 C 12 13 D 7 8 E 11 14 Which one of these portfolios cannot be a Markowitz efficient portfolio?

What is the expected return on this stock given the following information? State of the Economy Probability E(R) Boom .4 15\% Recession .6 -20\%

You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5%, regardless of the economic state. Given this, what must be value of the portfolio's variance be?

What is the standard deviation of a security that has the following expected returns? State of the Economy Probability of Rate of Return if State of Economy state occurs Boom .10 19\% Normal .75 13\% Recession .15 -7\%

If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:

A Brief History of Risk and Return

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