Question 1

The expected rate of return of a portfolio of risky securities is ________.

Accepted Answer

A)  the sum of the securities' covariance 
B)  the sum of the securities' variance 
C)  the weighted sum of the securities' expected returns 
D)  the weighted sum of the securities' variance 
A)  the sum of the securities' covariance 
B)  the sum of the securities' variance 
C)  the weighted sum of the securities' expected returns 
D)  the weighted sum of the securities' variance

Question 2

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Accepted Answer

A)  0% 
B)  10.8% 
C)  18% 
D)  24% 
A)  0% 
B)  10.8% 
C)  18% 
D)  24%

Question 3

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

Accepted Answer

A)  20% more 
B)  slightly more 
C)  20% less 
D)  slightly less 
A)  20% more 
B)  slightly more 
C)  20% less 
D)  slightly less

Question 4

The ________ reward-to-variability ratio is found on the ________ capital market line.

Accepted Answer

A)  lowest; steepest 
B)  highest; flattest 
C)  highest; steepest 
D)  lowest; flattest 
A)  lowest; steepest 
B)  highest; flattest 
C)  highest; steepest 
D)  lowest; flattest

Question 5

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is ________.

Accepted Answer

A)  0% 
B)  5% 
C)  7% 
D)  20% 
A)  0% 
B)  5% 
C)  7% 
D)  20%

Question 6

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

Accepted Answer

A)  -1 
B)  0 
C)  1 
D)  .5 
A)  -1 
B)  0 
C)  1 
D)  .5

Question 7

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and B is 20% and 10% respectively. The expected return on the minimum-variance portfolio is approximately ________.

Accepted Answer

A)  10% 
B)  13.6% 
C)  15% 
D)  19.41% 
A)  10% 
B)  13.6% 
C)  15% 
D)  19.41%

Question 8

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

Accepted Answer

A)  1 
B)  .75 
C)  .60 
D)  .55 
A)  1 
B)  .75 
C)  .60 
D)  .55

Question 9

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

Accepted Answer

A)  increase the systematic risk of the portfolio 
B)  increase the unsystematic risk of the portfolio 
C)  increase the return of the portfolio 
D)  decrease the variation in returns the investor faces in any one year 
A)  increase the systematic risk of the portfolio 
B)  increase the unsystematic risk of the portfolio 
C)  increase the return of the portfolio 
D)  decrease the variation in returns the investor faces in any one year

Question 10

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

Accepted Answer

A)  σ2rp 12σ12 + W22σ22) 
B)  σ2rp = (W12σ12 + W22σ22) 
C)  σ2rp = (W12σ12 - W22σ22) 
D)  σ2rp > (W12σ12 + W22σ22) 
A)  σ2rp 12σ12 + W22σ22) 
B)  σ2rp = (W12σ12 + W22σ22) 
C)  σ2rp = (W12σ12 - W22σ22) 
D)  σ2rp > (W12σ12 + W22σ22)

Question 11

The term excess return refers to ________.

Accepted Answer

A)  returns earned illegally by means of insider trading 
B)  the difference between the rate of return earned and the risk-free rate 
C)  the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk 
D)  the portion of the return on a security that represents tax liability and therefore cannot be reinvested 
A)  returns earned illegally by means of insider trading 
B)  the difference between the rate of return earned and the risk-free rate 
C)  the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk 
D)  the portion of the return on a security that represents tax liability and therefore cannot be reinvested

Question 12

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

Accepted Answer

A)  1 
B)  less than 1 
C)  between 0 and 1 
D)  less than or equal to 0 
A)  1 
B)  less than 1 
C)  between 0 and 1 
D)  less than or equal to 0

Question 13

The values of beta coefficients of securities are ________.

Accepted Answer

A)  always positive 
B)  always negative 
C)  always between positive 1 and negative 1 
D)  usually positive but are not restricted in any particular way 
A)  always positive 
B)  always negative 
C)  always between positive 1 and negative 1 
D)  usually positive but are not restricted in any particular way

Question 14

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.   Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Accepted Answer

A)  Stock A 
B)  Stock B 
C)  There is no difference between A or B. 
D)  The answer cannot be determined from the information given. 
A)  Stock A 
B)  Stock B 
C)  There is no difference between A or B. 
D)  The answer cannot be determined from the information given.

Question 15

Beta is a measure of security responsiveness to ________.

Accepted Answer

A)  firm-specific risk 
B)  diversifiable risk 
C)  market risk 
D)  unique risk 
A)  firm-specific risk 
B)  diversifiable risk 
C)  market risk 
D)  unique risk

Question 16

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and B is 20% and 10% respectively. The standard deviation of return on the minimum-variance portfolio is ________.

Accepted Answer

A)  0% 
B)  6% 
C)  12% 
D)  17% 
A)  0% 
B)  6% 
C)  12% 
D)  17%

Question 17

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of ________ and ________.

Accepted Answer

A)  identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs 
B)  identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile 
C)  identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion 
D)  choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate 
A)  identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs 
B)  identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile 
C)  identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion 
D)  choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

Question 18

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.

Accepted Answer

A)  .12 
B)  .36 
C)  .60 
D)  .77 
A)  .12 
B)  .36 
C)  .60 
D)  .77

Question 19

Diversification can reduce or eliminate ________ risk.

Accepted Answer

A)  all 
B)  systematic 
C)  nonsystematic 
D)  only an insignificant 
A)  all 
B)  systematic 
C)  nonsystematic 
D)  only an insignificant

Question 20

Which of the following statistics cannot be negative?

Accepted Answer

A)  covariance 
B)  variance 
C)  E(r) 
D)  correlation coefficient 
A)  covariance 
B)  variance 
C)  E(r) 
D)  correlation coefficient

The expected rate of return of a portfolio of risky securities is ________.

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

The reward-to-variability ratio is found on the capital market line.

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

The term excess return refers to ________.

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

The values of beta coefficients of securities are ________.

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Beta is a measure of security responsiveness to ________.

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of and .

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.

Diversification can reduce or eliminate ________ risk.

Which of the following statistics cannot be negative?

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

Exam 6: Efficient Diversification

The expected rate of return of a portfolio of risky securities is ________.

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

The ________ reward-to-variability ratio is found on the ________ capital market line.

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

The term excess return refers to ________.

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

The values of beta coefficients of securities are ________.

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Beta is a measure of security responsiveness to ________.

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of ________ and ________.

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.

Diversification can reduce or eliminate ________ risk.

Which of the following statistics cannot be negative?

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

The reward-to-variability ratio is found on the capital market line.

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of and .