Exam 6: Efficient Diversification

The correlation coefficient between two assets is equal to ________.

Share A has a beta of 1.2 and Share B has a beta of 1. The returns of Share A are ________ sensitive to changes in the market as the returns of Share B.

Which one of the following share return statistics fluctuates the most over time?

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

The ________ decision should take precedence over the ________ decision.

You find that the annual standard deviation of a share's returns is equal to 25%. For a 3-year holding period the standard deviation of your total return would equal ________.

Which of the following statements is true regarding time diversification? i. The standard deviation of the average annual rate of return over several years will be smaller than the one-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.

An investor can design a risky portfolio based on two shares, A and B. Share A has an expected return of 18% and a standard deviation of return of 20%. Share 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 0.50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in Share A is ________.

You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's ________. I. expected return II. standard deviation III. correlation with your portfolio

An investor can design a risky portfolio based on two shares, A and B. The standard deviation of return on Share A is 20% while the standard deviation on Share B is 15%. The expected return on Share A is 20% while on Share B it is 10%. The correlation coefficient between the return on A and B is 0%. The expected return on the minimum variance portfolio is approximately ________.

Reward-to-variability ratios are ________ on the ________ capital market line.

A share has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the share is 35%. What is the share's beta?

Beta is a measure of security responsiveness to ________.

An investor can design a risky portfolio based on two shares, A and B. Share A has an expected return of 18% and a standard deviation of return of 20%. Share 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 0.50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is ________.

A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your money. What is the standard deviation of this investment?

Diversification can reduce or eliminate ________ risk.