Exam 6: Efficient Diversification

Which of the following provides the best example of a systematic-risk event?

A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called ________.

The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?

You run a regression for a stock's return on a market index and find the following Excel output: ________ % of the variance is explained by this regression.

A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project?

You run a regression for a stock's return on a market index and find the following Excel output: The stock is ________ riskier than the typical stock.

The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market

Based on the outcomes in the following table, choose which of the statements below is (are) correct? I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive.

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

The portfolio with the lowest standard deviation for any risk premium is called the_______.

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is ________.

Which of the following correlation coefficients will produce the most diversification benefits?

Market risk is also called ________ and ________.

You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal ________.

If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ________.

You run a regression for a stock's return on a market index and find the following Excel output: The characteristic line for this stock is Rstock = ________ + ________ Rmarket.