Question 1

A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.

Accepted Answer

A) True 
 B)False

Question 2

A positive covariance between two variables indicates that

Accepted Answer

A)  the two variables move in different directions. 
B)  the two variables move in the same direction. 
C)  the two variables are low risk. 
D)  the two variables are high risk. 
E)  the two variables are risk free. 
A)  the two variables move in different directions. 
B)  the two variables move in the same direction. 
C)  the two variables are low risk. 
D)  the two variables are high risk. 
E)  the two variables are risk free.

Question 3

The purpose of calculating the covariance between two stocks is to provide a(n)____ measure of their movement together.

Accepted Answer

A)  Absolute 
B)  Relative 
C)  Indexed 
D)  Loglinear 
E)  Squared 
A)  Absolute 
B)  Relative 
C)  Indexed 
D)  Loglinear 
E)  Squared

Question 4

What is the standard deviation of an equally weighted portfolio of two stocks with a covariance of 0.009,if the standard deviation of the first stock is 15% and the standard deviation of the second stock is 20%?

Accepted Answer

A)  2.0% 
B)  2.1% 
C)  7.8% 
D)  14.2% 
E)  14.7% 
A)  2.0% 
B)  2.1% 
C)  7.8% 
D)  14.2% 
E)  14.7%

Question 5

A measure that only considers deviations above the mean is semi-variance.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Given the following weights and expected security returns,calculate the expected return for the portfolio.
$$\begin{array} { c c } 
\text { Weight } & \text { Expertad Return } \
\hline .20 & .06 \
.25 & .08 \
.30 & .10 \
25 & 12
\end{array}$$

Accepted Answer

A)  0.085 
B)  0.090 
C)  0.092 
D)  0.097 
E)  None of the above 
A)  0.085 
B)  0.090 
C)  0.092 
D)  0.097 
E)  None of the above

Question 8

Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s).

Accepted Answer

A)  One 
B)  Two 
C)  Three 
D)  Four 
E)  Five 
A)  One 
B)  Two 
C)  Three 
D)  Four 
E)  Five

Question 9

What is the expected return of the three stock portfolio described below?
$$\begin{array} { l c c } 
\text { Comman Stack } & \text { MFrket Value } & \text { Experted Raturn } \
\hline \text { Xerax } & 125,000 & 8 \% \
\text { Yelcan } & 250,000 & 25 \% \
\text { Zurebal } & 175,000 & 16 \%
\end{array}$$

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 10

Exhibit 7.10
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c } 
Asset ( A ) & \text { Asset(B) }  \
\mathrm { E } \left( R _ { A } \right) = 16 \% & \mathrm { E } \left( \mathrm { R } _ { B } \right) = 14 \% \
\left( \sigma _ { A } \right) = 3 \% & \left( \sigma _ { B } \right) = 0 \% \
W _ { A } =0 .5 & W _ { B } =0 .5 \
C O V _ { A , B } =0 .0014
\end{array}$$
-Refer to Exhibit 7.10.What is the expected return of a portfolio of two risky assets if the expected return E(R?),standard deviation (s?),covariance (COV?,?),and asset weight (W?)are as shown above?

Accepted Answer

A)  11% 
B)  12% 
C)  13% 
D)  14% 
E)  15% 
A)  11% 
B)  12% 
C)  13% 
D)  14% 
E)  15%

Question 11

Exhibit 7.2
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c } 
A _ { 1 } + ( A ) & \text { AEEE } ( \mathbf { E } ) \
\hline E \left( R _ { A } \right) = 25 \% & E \left( R _ { B } \right) = 15 \% \
\left( \sigma _ { A } \right) = 19 \% & \left( \sigma _ { B } \right) = 11 \% \
W _ { A } =0 .75 & W _ { B } =0 .25 \
C O V _ { A , B } = - 0.0009
\end{array}$$
-Refer to Exhibit 7.2.What is the expected return of a portfolio of two risky assets if the expected return E(R?),standard deviation (s?),covariance (COV?,?),and asset weight (W?)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 12

Which of the following statements about the correlation coefficient is false?

Accepted Answer

A)  The values range between -1 to +1. 
B)  A value of +1 implies that the returns for the two stocks move together in a completely linear manner. 
C)  A value of -1 implies that the returns move in a completely opposite direction. 
D)  A value of zero means that the returns are independent. 
E)  None of the above (that is, all statements are true) 
A)  The values range between -1 to +1. 
B)  A value of +1 implies that the returns for the two stocks move together in a completely linear manner. 
C)  A value of -1 implies that the returns move in a completely opposite direction. 
D)  A value of zero means that the returns are independent. 
E)  None of the above (that is, all statements are true)

Question 13

Semivariance,when applied to portfolio theory,is concerned with

Accepted Answer

A)  The square root of deviations from the mean. 
B)  All deviations below the mean. 
C)  All deviations above the mean. 
D)  All deviations. 
E)  The summation of the squared deviations from the mean. 
A)  The square root of deviations from the mean. 
B)  All deviations below the mean. 
C)  All deviations above the mean. 
D)  All deviations. 
E)  The summation of the squared deviations from the mean.

Question 14

A good portfolio is a collection of individually good assets.

Accepted Answer

A) True 
 B)False

Question 15

The set of portfolios with the maximum rate of return for every given risk level is known as the optimal frontier.

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 7.3
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c } 
 A sset (A) & \text {  A sset (B) } \
\hline \left( R _ { A } \right) = 9 \% & E \left( R _ { B } \right) = 11 \% \
\left( \sigma _ { A } \right) = 4 \% & \left( \sigma _ { B } \right) = 6 \% \
W _ { A } = 0 .4 & W _ { B } = 0 .6 \
C O V _ { A , B } = 0 .0011
\end{array}$$

-Refer to Exhibit 7.3.What is the standard deviation of this portfolio?

Accepted Answer

A)  3.68% 
B)  4.56% 
C)  4.99% 
D)  5.16% 
E)  6.02% 
A)  3.68% 
B)  4.56% 
C)  4.99% 
D)  5.16% 
E)  6.02%

Question 17

A portfolio is considered to be efficient if:

Accepted Answer

A)  No other portfolio offers higher expected returns with the same risk. 
B)  No other portfolio offers lower risk with the same expected return. 
C)  There is no portfolio with a higher return. 
D)  Choices a and b 
E)  All of the above 
A)  No other portfolio offers higher expected returns with the same risk. 
B)  No other portfolio offers lower risk with the same expected return. 
C)  There is no portfolio with a higher return. 
D)  Choices a and b 
E)  All of the above

Question 18

What is the expected return of the three stock portfolio described below?
$$\begin{array} { l c c } 
\text { Common Stark } & \text { MFarket Value } & \text { Experted Raturn } \
\hline \text { Allen Inc. } & 25,000 & 38 \% \
\text { Belnant Co. } & 100,000 & 10 \% \
\text { Cardo Inc. } & 75,000 & 16 \%
\end{array}$$

Accepted Answer

A)  21.33% 
B)  12.50% 
C)  32.00% 
D)  15.75% 
E)  16.80% 
A)  21.33% 
B)  12.50% 
C)  32.00% 
D)  15.75% 
E)  16.80%

Question 19

Risk is defined as the uncertainty of future outcomes.

Accepted Answer

A) True 
 B)False

Question 20

Between 1980 and 2000,the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10,respectively,and the covariance of these index returns was 0.0007.What was the correlation coefficient between the two market indicators?

Accepted Answer

A)  .0906 
B)  .0985 
C)  .0796 
D)  .0875 
E)  .0654 
A)  .0906 
B)  .0985 
C)  .0796 
D)  .0875 
E)  .0654

Exam 7: An Introduction to Portfolio Management

A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.

A positive covariance between two variables indicates that

The purpose of calculating the covariance between two stocks is to provide a(n)____ measure of their movement together.

What is the standard deviation of an equally weighted portfolio of two stocks with a covariance of 0.009,if the standard deviation of the first stock is 15% and the standard deviation of the second stock is 20%?

A measure that only considers deviations above the mean is semi-variance.

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 the following weights and expected security returns,calculate the expected return for the portfolio. Weight Expertad Return .20 .06 .25 .08 .30 .10 25 12

Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s).

What is the expected return of the three stock portfolio described below? Comman Stack MFrket Value Experted Raturn Xerax 125,000 8\% Yelcan 250,000 25\% Zurebal 175,000 16\%

Which of the following statements about the correlation coefficient is false?

Semivariance,when applied to portfolio theory,is concerned with

A good portfolio is a collection of individually good assets.

The set of portfolios with the maximum rate of return for every given risk level is known as the optimal frontier.

Exhibit 7.3 Use the Information Below for the Following Problem(S) Asset(A) A sset (B) =9\% E =11\% =4\% =6\% =0.4 =0.6 CO=0.0011 -Refer to Exhibit 7.3.What is the standard deviation of this portfolio?

A portfolio is considered to be efficient if:

What is the expected return of the three stock portfolio described below? Common Stark MFarket Value Experted Raturn Allen Inc. 25,000 38\% Belnant Co. 100,000 10\% Cardo Inc. 75,000 16\%

Risk is defined as the uncertainty of future outcomes.

Between 1980 and 2000,the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and 0.10,respectively,and the covariance of these index returns was 0.0007.What was the correlation coefficient between the two market indicators?

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

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

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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