Question 1

A portfolio of two securities that are perfectly positively correlated has

Accepted Answer

A)  A standard deviation that is the weighted average of the individual securities standard deviations. 
B)  An expected return that is the weighted average of the individual securities expected returns. 
C)  No diversification benefit over holding either of the securities independently. 
D)  Both b and c 
E)  All of the above 
A)  A standard deviation that is the weighted average of the individual securities standard deviations. 
B)  An expected return that is the weighted average of the individual securities expected returns. 
C)  No diversification benefit over holding either of the securities independently. 
D)  Both b and c 
E)  All of the above

Question 2

Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Between 1986 and 1996,the standard deviation of the returns for the NYSE and the DJIA indexes were 0.10 and 0.09,respectively,and the covariance of these index returns was 0.0009.What was the correlation coefficient between the two market indicators?

Accepted Answer

A)  .1000 
B)  .1100 
C)  .1258 
D)  .1322 
E)  .1164 
A)  .1000 
B)  .1100 
C)  .1258 
D)  .1322 
E)  .1164

Question 5

The slope of the efficient frontier is calculated as follows

Accepted Answer

A)  E(Rportfolio)/E(σportfolio) 
B)  E(σportfolio)/ E(Rportfolio) 
C)  DE(Rportfolio)/DE(σportfolio) 
D)  DE(σportfolio)/DE(Rportfolio) 
E)  None of the above 
A)  E(Rportfolio)/E(σportfolio) 
B)  E(σportfolio)/ E(Rportfolio) 
C)  DE(Rportfolio)/DE(σportfolio) 
D)  DE(σportfolio)/DE(Rportfolio) 
E)  None of the above

Question 6

The most important criteria when adding new investments to a portfolio is the

Accepted Answer

A)  Expected return of the new investment. 
B)  Standard deviation of the new investment. 
C)  Correlation of the new investment with the portfolio. 
D)  Both a and b 
E)  All of the above are equally important 
A)  Expected return of the new investment. 
B)  Standard deviation of the new investment. 
C)  Correlation of the new investment with the portfolio. 
D)  Both a and b 
E)  All of the above are equally important

Question 7

Exhibit 7.1
Use the Information Below for the Following Problem(S)
 $\begin{array}{cc}
\text { Asset }(A) & \text { Asset }(B) \
\hline\left(R_{A}\right)=10 \% & E\left(R_{B}\right)=15 \% \
\left(\sigma_{A}\right)=8 \% & \left(\sigma_{B}\right)=9.5 \% \
W_{A}=0.25 & W_{B}=0.75 \
&\text { CoV }_{A}=0.006
\end{array}$

-Refer to Exhibit 7.1.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)  8.79% 
B)  12.5% 
C)  13.75% 
D)  7.72% 
E)  12% 
A)  8.79% 
B)  12.5% 
C)  13.75% 
D)  7.72% 
E)  12%

Question 8

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 9

Markowitz assumed that,given an expected return,investors prefer to minimize risk.

Accepted Answer

A) True 
 B)False

Question 10

When assessing the risk impact of adding a new security to a portfolio,it is necessary to consider the

Accepted Answer

A)  New securities variance 
B)  Variance of every security in the portfolio 
C)  Weight of every security in the portfolio 
D)  Average covariance of the new security with every security in the portfolio 
E)  All of the above 
A)  New securities variance 
B)  Variance of every security in the portfolio 
C)  Weight of every security in the portfolio 
D)  Average covariance of the new security with every security in the portfolio 
E)  All of the above

Question 11

Exhibit 7.12
Use the Information Below for the Following Problem(S)
 $\begin{array}{cc}
\text { Asset } 1 & \text { Asset 2 } \
\hline E\left(R_{1}\right)=.12 & E\left(R_{2}\right)=.16 \
E\left(\sigma_{1}\right)=.04 & E\left(\sigma_{2}\right)=.06
\end{array}$
-Refer to Exhibit 7.12.Calculate the expected return and expected standard deviation of a two stock portfolio when r?,? = -.60 and w? = .75.

Accepted Answer

A)  .13 and .0024 
B)  .13 and .0455 
C)  .12 and .0585 
D)  .12 and .5585 
E)  .13 and .6758 
A)  .13 and .0024 
B)  .13 and .0455 
C)  .12 and .0585 
D)  .12 and .5585 
E)  .13 and .6758

Question 12

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 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)  8.95% 
B)  9.30% 
C)  9.95% 
D)  10.20% 
E)  10.70% 
A)  8.95% 
B)  9.30% 
C)  9.95% 
D)  10.20% 
E)  10.70%

Question 13

For a two stock portfolio containing Stocks i and j,the correlation coefficient of returns (rᵢⱼ)is equal to the square root of the covariance (covᵢⱼ).

Accepted Answer

A) True 
 B)False

Question 14

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 15

Exhibit 7.9
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c } 
Asset( A ) & \text { Asset } (B)\
\mathrm { E } \left( R _ { A } \right) = 19 \% & \mathrm { E } \left( \mathrm { R } _ { B } \right) = 13 \% \
\left( \sigma _ { A } \right) = 7\% & \left( \sigma _ { B } \right) = 6 \% \
W _ { A } =0 .3 & W _ { B } = 0 .7 \
C O V _ { A , B } =0 .0011
\end{array}$$
-Refer to Exhibit 7.9.What is the standard deviation of this portfolio?

Accepted Answer

A)  5.16% 
B)  5.89% 
C)  6.11% 
D)  6.57% 
E)  7.02% 
A)  5.16% 
B)  5.89% 
C)  6.11% 
D)  6.57% 
E)  7.02%

Question 16

Exhibit 7.12
Use the Information Below for the Following Problem(S)
 $\begin{array}{cc}
\text { Asset } 1 & \text { Asset 2 } \
\hline E\left(R_{1}\right)=.12 & E\left(R_{2}\right)=.16 \
E\left(\sigma_{1}\right)=.04 & E\left(\sigma_{2}\right)=.06
\end{array}$
-Refer to Exhibit 7.12.Calculate the expected returns and expected standard deviations of a two stock portfolio when r?,? = .80 and w? = .60.

Accepted Answer

A)  .144 and .0002 
B)  .144 and .0018 
C)  .136 and .0045 
D)  .136 and .0455 
E)  .136 and .4554 
A)  .144 and .0002 
B)  .144 and .0018 
C)  .136 and .0045 
D)  .136 and .0455 
E)  .136 and .4554

Question 17

Exhibit 7.8
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c } 
Asser (A) & \text { Asset ( B)} \
\mathrm { E } \left( R _ { A } \right) = 1 [ \% & \mathrm { E } \left( \mathrm { R } _ { B } \right) = 14 \% \
\left( \sigma _ { A } \right) = 7 / & \left( \sigma _ { B } \right) = 8 \% \
W _ { A } =0 .7 & W _ { B } = 0 .3 \
C O V _ { A , B } = 0 .0013
\end{array}$$
-Refer to Exhibit 7.8.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)  6.4% 
B)  9.1% 
C)  10.2% 
D)  10.8% 
E)  11.2% 
A)  6.4% 
B)  9.1% 
C)  10.2% 
D)  10.8% 
E)  11.2%

Question 18

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.
 $$\begin{array} { c c } 
\text { Prabability } & \text { Return } \
\hline 0.25 & 0 .02 \
0.50 & 0.14 \
0.25 & 0.30
\end{array}$$
-Refer to Exhibit 7.16.What is the standard deviation for Top Choice Corporation?

Accepted Answer

A)  0.1% 
B)  6.3% 
C)  7.9% 
D)  9.4% 
E)  12.1% 
A)  0.1% 
B)  6.3% 
C)  7.9% 
D)  9.4% 
E)  12.1%

Question 19

Exhibit 7.7
Use the Information Below for the Following Problem(S)
 $$\begin{array} { c c } 
A R _ { E } + ( A ) & \text { AFEE } ( \mathbf { E } ) \
\hline \left( R _ { A } \right) = 7 / & E \left( R _ { B } \right) = 9 \% \
\left( \sigma _ { A } \right) = 6 \% & \left( \sigma _ { B } \right) = 5 \% \
W _ { A } = 0.6 & W _ { B } = 0 .4 \
C O V _ { A , B } =0 .0014
\end{array}$$
-Refer to Exhibit 7.7.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)  5.8% 
B)  6.1% 
C)  6.9% 
D)  7.8% 
E)  8.9% 
A)  5.8% 
B)  6.1% 
C)  6.9% 
D)  7.8% 
E)  8.9%

Question 20

Exhibit 7.15
Use the Information Below for the Following Problem(S)
 $\begin{array}{cc}
\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \
\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=14 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=16 \% \
\left(\sigma_{\mathrm{A}}\right)=13 \% & \left(\sigma_{\mathrm{B}}\right)=18 \% \
\mathrm{~W}_{\mathrm{A}}=0.4 & \mathrm{~W}_{\mathrm{B}}=0.6
\end{array}$
               $\mathrm{COV}_{\mathrm{AB}}=0.0024$

-Refer to Exhibit 7.15.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)  13.8% 
B)  14.6% 
C)  15.0% 
D)  15.2% 
E)  16.8% 
A)  13.8% 
B)  14.6% 
C)  15.0% 
D)  15.2% 
E)  16.8%

Exam 7: An Introduction to Portfolio Management

A portfolio of two securities that are perfectly positively correlated has

Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.

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.

Between 1986 and 1996,the standard deviation of the returns for the NYSE and the DJIA indexes were 0.10 and 0.09,respectively,and the covariance of these index returns was 0.0009.What was the correlation coefficient between the two market indicators?

The slope of the efficient frontier is calculated as follows

The most important criteria when adding new investments to a portfolio is the

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.

Markowitz assumed that,given an expected return,investors prefer to minimize risk.

When assessing the risk impact of adding a new security to a portfolio,it is necessary to consider the

Exhibit 7.12 Use the Information Below for the Following Problem(S) Asset 1 Asset 2 E =.12 E =.16 E =.04 E =.06 -Refer to Exhibit 7.12.Calculate the expected return and expected standard deviation of a two stock portfolio when r?,? = -.60 and w? = .75.

For a two stock portfolio containing Stocks i and j,the correlation coefficient of returns (rᵢⱼ)is equal to the square root of the covariance (covᵢⱼ).

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 7.9 Use the Information Below for the Following Problem(S) Asset(A) Asset (B) =19\% =13\% =7\% =6\% =0.3 =0.7 CO=0.0011 -Refer to Exhibit 7.9.What is the standard deviation of this portfolio?

Exhibit 7.12 Use the Information Below for the Following Problem(S) Asset 1 Asset 2 E =.12 E =.16 E =.04 E =.06 -Refer to Exhibit 7.12.Calculate the expected returns and expected standard deviations of a two stock portfolio when r?,? = .80 and w? = .60.

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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