Question 1

A portfolio invested partly in the risk free rate and partly in the market portfolio is a

Accepted Answer

A)  borrowing portfolio. 
B)  inefficient portfolio. 
C)  lending portfolio. 
D)  dominated portfolio. 
A)  borrowing portfolio. 
B)  inefficient portfolio. 
C)  lending portfolio. 
D)  dominated portfolio.

Question 2

Common stocks share a common risk factor knows as_____ risk.

Accepted Answer

A)  financial risk 
B)  unsystematic risk 
C)  market risk 
D)  business risk 
A)  financial risk 
B)  unsystematic risk 
C)  market risk 
D)  business risk

Question 3

If two stocks are positively correlated, their covariance must also be positive.

Accepted Answer

A) True 
 B)False

Question 4

An efficient portfolio invested partly in the risk free rate is a lending portfolio.

Accepted Answer

A) True 
 B)False

Question 5

The Fama and French study

Accepted Answer

A)  affirms the usefulness of beta. 
B)  affirms the usefulness of delta. 
C)  calls into question the usefulness of delta. 
D)  calls into question the usefulness of beta. 
A)  affirms the usefulness of beta. 
B)  affirms the usefulness of delta. 
C)  calls into question the usefulness of delta. 
D)  calls into question the usefulness of beta.

Question 6

The eligible security universe may differ by investor.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is most accurate?

Accepted Answer

A)  The minimum variance portfolio contains at least three securities. 
B)  The minimum variance portfolio is the single security with least total risk. 
C)  The minimum variance portfolio is dominated by the risk free rate. 
D)  The minimum variance portfolio has the least total risk. 
A)  The minimum variance portfolio contains at least three securities. 
B)  The minimum variance portfolio is the single security with least total risk. 
C)  The minimum variance portfolio is dominated by the risk free rate. 
D)  The minimum variance portfolio has the least total risk.

Question 8

The security market line is a concept similar to the capital market line except that

Accepted Answer

A)  risk is measured by beta 
B)  return is measured by the median 
C)  return is measured by quarterly values 
D)  return is exclusive of dividends 
A)  risk is measured by beta 
B)  return is measured by the median 
C)  return is measured by quarterly values 
D)  return is exclusive of dividends

Question 9

The risk that common stocks share is called

Accepted Answer

A)  portfolio risk 
B)  market risk 
C)  unsystematic risk 
D)  correlation risk 
A)  portfolio risk 
B)  market risk 
C)  unsystematic risk 
D)  correlation risk

Question 10

Naïve diversification indicates only 8 securities are needed for portfolio diversification.

Accepted Answer

A) True 
 B)False

Question 11

The computational difficulty of the Markowitz model is eased by the

Accepted Answer

A)  single index model. 
B)  capital asset pricing model. 
C)  use of a single return benchmark. 
D)  all of the above. 
A)  single index model. 
B)  capital asset pricing model. 
C)  use of a single return benchmark. 
D)  all of the above.

Question 12

The returns of two common stocks are usually

Accepted Answer

A)  positively correlated. 
B)  negatively correlated. 
C)  uncorrelated. 
D)  perfectly correlated. 
A)  positively correlated. 
B)  negatively correlated. 
C)  uncorrelated. 
D)  perfectly correlated.

Question 13

All common stock faces market risk.

Accepted Answer

A) True 
 B)False

Question 14

If a rate of return of 13.8% is expected on a stock with a beta of 1.2 when the risk free rate is 3% and the market risk premium is 9%, the expected return on the market portfolio is 11%.

Accepted Answer

A) True 
 B)False

Question 15

For risk reduction purposes, correlations that are _____ are most desirable.

Accepted Answer

A)  positive 
B)  negative 
C)  zero 
D)  near 0.50 
A)  positive 
B)  negative 
C)  zero 
D)  near 0.50

Question 16

Researchers frequently estimate beta using

Accepted Answer

A)  the capital asset pricing model. 
B)  the security market line. 
C)  the market model. 
D)  the dividend discount model. 
A)  the capital asset pricing model. 
B)  the security market line. 
C)  the market model. 
D)  the dividend discount model.

Question 17

The expected return of a portfolio is a weighted average of the component expected returns.

Accepted Answer

A) True 
 B)False

Question 18

The market risk premium declines as beta increases.

Accepted Answer

A) True 
 B)False

Question 19

Systematic risk is measured by

Accepted Answer

A)  alpha. 
B)  beta. 
C)  gamma. 
D)  delta. 
A)  alpha. 
B)  beta. 
C)  gamma. 
D)  delta.

Question 20

Growth rates must be sustainable to be meaningful in the long run.

Accepted Answer

A) True 
 B)False

Exam 16: Why Diversify

A portfolio invested partly in the risk free rate and partly in the market portfolio is a

Common stocks share a common risk factor knows as_____ risk.

If two stocks are positively correlated, their covariance must also be positive.

An efficient portfolio invested partly in the risk free rate is a lending portfolio.

The Fama and French study

The eligible security universe may differ by investor.

Which of the following is most accurate?

The security market line is a concept similar to the capital market line except that

The risk that common stocks share is called

Naïve diversification indicates only 8 securities are needed for portfolio diversification.

The computational difficulty of the Markowitz model is eased by the

The returns of two common stocks are usually

All common stock faces market risk.

If a rate of return of 13.8% is expected on a stock with a beta of 1.2 when the risk free rate is 3% and the market risk premium is 9%, the expected return on the market portfolio is 11%.

For risk reduction purposes, correlations that are _____ are most desirable.

Researchers frequently estimate beta using

The expected return of a portfolio is a weighted average of the component expected returns.

The market risk premium declines as beta increases.

Systematic risk is measured by

Growth rates must be sustainable to be meaningful in the long run.

Understanding Risk and Return

The Marketplace

Bond Fundamentals

Common Stock

Market Mechanics

Fundamental Stock Analysis

Valuation Tools

Technical Analysis

Market Efficiency

Behavioral Finance

Gathering Investment Information

Market Indexes

Convertible Securities

Investing Internationally

Derivative Assets

Managing the Equity Portfolio

Managing the Fixed Income Portfolio

Mortgage-Backed Securities

Investment Companies

Performance Measurement and Presentation

Filters