Question 1

In basic terms, what is the major benefit of diversification?
 How does diversification work?

Accepted Answer

Diversification permits an investor to r

Question 2

The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as the __________ risk.

Accepted Answer

A)  Market 
B)  Diversifiable 
C)  Non-diversifiable 
D)  Inefficient 
E)  Efficient 
A)  Market 
B)  Diversifiable 
C)  Non-diversifiable 
D)  Inefficient 
E)  Efficient

Question 3

If the correlation between two assets is __________, all risk can be eliminated in a portfolio.

Accepted Answer

A)  - 100 
B)  - 1 
C)  0 
D)  + 1 
E)  + 100 
A)  - 100 
B)  - 1 
C)  0 
D)  + 1 
E)  + 100

Question 4

A particular portfolio has an expected return that is unaffected by the state of the economy. The variance of this portfolio must

Accepted Answer

A)  Be negative 
B)  Be less than 1 
C)  Be greater than 1 
D)  Be equal to 1 
E)  Be equal to 0 
A)  Be negative 
B)  Be less than 1 
C)  Be greater than 1 
D)  Be equal to 1 
E)  Be equal to 0

Question 5

Which of the following assets cannot lie on the Markowitz efficient frontier?

Accepted Answer

A)  Expected return = 16 percent; Standard deviation = 62 percent 
B)  Expected return = 13 percent; Standard deviation = 45 percent 
C)  Expected return = 9 percent; Standard deviation = 36 percent 
D)  Expected return = 11 percent; Standard deviation = 47 percent 
E)  All of the assets could lie on the Markowitz efficient frontier. 
A)  Expected return = 16 percent; Standard deviation = 62 percent 
B)  Expected return = 13 percent; Standard deviation = 45 percent 
C)  Expected return = 9 percent; Standard deviation = 36 percent 
D)  Expected return = 11 percent; Standard deviation = 47 percent 
E)  All of the assets could lie on the Markowitz efficient frontier.

Question 6

__________ is a statistical measure of the degree to which two variables (e.g. securities' returns) move together.

Accepted Answer

A)  Covariance 
B)  Variance 
C)  Skewness 
D)  Coefficient of variation 
E)  Tangency 
A)  Covariance 
B)  Variance 
C)  Skewness 
D)  Coefficient of variation 
E)  Tangency

Question 7

A stock has an expected return of 14 percent and a standard deviation of 61 percent. What is the weight of the stock in the minimum variance portfolio consisting of the stock and the risk-free asset?

Accepted Answer

A)  .00 
B)  .18 
C)  .06 
D)  .21 
E)  .32 
A)  .00 
B)  .18 
C)  .06 
D)  .21 
E)  .32

Question 8

The major benefit of diversification is to:

Accepted Answer

A)  increase the expected return. 
B)  decrease the expected return. 
C)  decrease the risk. 
D)  make the stock market more efficient. 
E)  increase investor participation in the market. 
A)  increase the expected return. 
B)  decrease the expected return. 
C)  decrease the risk. 
D)  make the stock market more efficient. 
E)  increase investor participation in the market.

Question 9

While Stock A has a standard deviation of 37 percent, Stock B has a standard deviation of 46 percent. Given the covariance between the two stocks is -0.0255, determine the correlation coefficient.

Accepted Answer

A)  - 0.25 
B)  0.60 
C)  - 0.15 
D)  0.30 
E)  0.15 
A)  - 0.25 
B)  0.60 
C)  - 0.15 
D)  0.30 
E)  0.15

Question 10

The extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset is called the

Accepted Answer

A)  Inefficient premium 
B)  Diversification benefit 
C)  Expected return 
D)  Portfolio adjustment 
E)  Risk premium 
A)  Inefficient premium 
B)  Diversification benefit 
C)  Expected return 
D)  Portfolio adjustment 
E)  Risk premium

Question 11

Variance is a measure of

Accepted Answer

A)  Return 
B)  Risk 
C)  Correlation 
D)  Diversification 
E)  Efficiency 
A)  Return 
B)  Risk 
C)  Correlation 
D)  Diversification 
E)  Efficiency

Question 12

The minimum correlation is __________ and the maximum correlation is __________.

Accepted Answer

A)  - 1; 0 
B)  - 1; + 1 
C)  0 ; + 1 
D)  - 100; +100 
E)  negative infinity; positive infinity 
A)  - 1; 0 
B)  - 1; + 1 
C)  0 ; + 1 
D)  - 100; +100 
E)  negative infinity; positive infinity

Question 13

The portfolio weight of an asset is the

Accepted Answer

A)  Market value of that asset expressed as a percentage of the asset's initial cost 
B)  Market value of that asset expressed as a percentage of the total portfolio value 
C)  Cost invested in that asset expressed as a percentage of the total cost of the portfolio 
D)  Number of shares held in that asset divided by the total number of shares owned 
E)  Return on the asset as a fraction of the entire return on the portfolio 
A)  Market value of that asset expressed as a percentage of the asset's initial cost 
B)  Market value of that asset expressed as a percentage of the total portfolio value 
C)  Cost invested in that asset expressed as a percentage of the total cost of the portfolio 
D)  Number of shares held in that asset divided by the total number of shares owned 
E)  Return on the asset as a fraction of the entire return on the portfolio

Question 14

What is the typical range of the variance of return for a stock portfolio?

Accepted Answer

A)  0 to 1 
B)  - 1 to + 1 
C)  0 to + 100 
D)  Between the high and low values for the individual returns being used 
E)  No precise range exists 
A)  0 to 1 
B)  - 1 to + 1 
C)  0 to + 100 
D)  Between the high and low values for the individual returns being used 
E)  No precise range exists

Question 15

Describe the difference between the 'expected return' and the 'realized return' of an asset.

Accepted Answer

The expected return of an asset consider

Question 16

$\begin{array}{c}
\begin{array}{c}
\underline{\text {State of the economy}}\
\text {Boom}\
\text {Recession}
\end{array}
\begin{array}{c}
\underline{\text {Probability}}\
.3\
.7\

\end{array}
\begin{array}{c}
\underline{\text {Stock Q}}\
14 \% \
8\% \

\end{array}
\end{array}$
  
-What is the expected return of Stock Q?

Accepted Answer

A)  12.3% 
B)  9.8% 
C)  10.9% 
D)  11.2% 
E)  8.5% 
A)  12.3% 
B)  9.8% 
C)  10.9% 
D)  11.2% 
E)  8.5%

Question 17

A portfolio is equally invested in two stocks. The standard deviations are 58% and 46%, respectively. If the correlation between the stocks is 0.24, what is the variance of the portfolio?

Accepted Answer

A)  0.1690 
B)  0.2382 
C)  0.1813 
D)  0.2489 
E)  0.2046 
A)  0.1690 
B)  0.2382 
C)  0.1813 
D)  0.2489 
E)  0.2046

Question 18

__________ is the extent to which the returns on two assets move together.

Accepted Answer

A)  Standard deviation 
B)  Variance 
C)  Correlation 
D)  Efficiency 
E)  Tangency 
A)  Standard deviation 
B)  Variance 
C)  Correlation 
D)  Efficiency 
E)  Tangency

Question 19

A combination of assets held by an investor is known as a(n) __________.

Accepted Answer

A)  Opportunity set 
B)  Efficient asset 
C)  Markowitz selection 
D)  Portfolio 
E)  Minimum variance option 
A)  Opportunity set 
B)  Efficient asset 
C)  Markowitz selection 
D)  Portfolio 
E)  Minimum variance option

Question 20

The expected return on a portfolio is affected by the I) choice of securities held in the portfolio
II) return of each security given a particular economic state
III) portfolio weight assigned to each security
IV) probability of each economic state occurring

Accepted Answer

A)  II and III 
B)  II and Iv 
C)  I, II and III 
D)  II, III and Iv 
E)  I, II, III and IV 
A)  II and III 
B)  II and Iv 
C)  I, II and III 
D)  II, III and Iv 
E)  I, II, III and IV

In basic terms, what is the major benefit of diversification? How does diversification work?

The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as the __________ risk.

If the correlation between two assets is __________, all risk can be eliminated in a portfolio.

A particular portfolio has an expected return that is unaffected by the state of the economy. The variance of this portfolio must

Which of the following assets cannot lie on the Markowitz efficient frontier?

__________ is a statistical measure of the degree to which two variables (e.g. securities' returns) move together.

A stock has an expected return of 14 percent and a standard deviation of 61 percent. What is the weight of the stock in the minimum variance portfolio consisting of the stock and the risk-free asset?

The major benefit of diversification is to:

While Stock A has a standard deviation of 37 percent, Stock B has a standard deviation of 46 percent. Given the covariance between the two stocks is -0.0255, determine the correlation coefficient.

The extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset is called the

Variance is a measure of

The minimum correlation is and the maximum correlation is .

The portfolio weight of an asset is the

What is the typical range of the variance of return for a stock portfolio?

Describe the difference between the 'expected return' and the 'realized return' of an asset.

Boom Recession .3 .7 14\% 8\% -What is the expected return of Stock Q?

A portfolio is equally invested in two stocks. The standard deviations are 58% and 46%, respectively. If the correlation between the stocks is 0.24, what is the variance of the portfolio?

__________ is the extent to which the returns on two assets move together.

A combination of assets held by an investor is known as a(n) __________.

The expected return on a portfolio is affected by the I) choice of securities held in the portfolio II) return of each security given a particular economic state III) portfolio weight assigned to each security IV) probability of each economic state occurring

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behaviour and Market Efficiency

Behavioural Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Return, Risk and Security Management

Performance Evaluation and Risk Management

Options

Option Valuation

Futures Contracts

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds and Mortgaged-Backed Securities

International Portfolio Investment

Filters

Exam 2: Diversification and Risky Asset Allocation

In basic terms, what is the major benefit of diversification? How does diversification work?

The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as the __________ risk.

If the correlation between two assets is __________, all risk can be eliminated in a portfolio.

A particular portfolio has an expected return that is unaffected by the state of the economy. The variance of this portfolio must

Which of the following assets cannot lie on the Markowitz efficient frontier?

__________ is a statistical measure of the degree to which two variables (e.g. securities' returns) move together.

A stock has an expected return of 14 percent and a standard deviation of 61 percent. What is the weight of the stock in the minimum variance portfolio consisting of the stock and the risk-free asset?

The major benefit of diversification is to:

While Stock A has a standard deviation of 37 percent, Stock B has a standard deviation of 46 percent. Given the covariance between the two stocks is -0.0255, determine the correlation coefficient.

The extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset is called the

Variance is a measure of

The minimum correlation is __________ and the maximum correlation is __________.

The portfolio weight of an asset is the

What is the typical range of the variance of return for a stock portfolio?

Describe the difference between the 'expected return' and the 'realized return' of an asset.

Boom Recession .3 .7 14\% 8\% -What is the expected return of Stock Q?

A portfolio is equally invested in two stocks. The standard deviations are 58% and 46%, respectively. If the correlation between the stocks is 0.24, what is the variance of the portfolio?

__________ is the extent to which the returns on two assets move together.

A combination of assets held by an investor is known as a(n) __________.

The expected return on a portfolio is affected by the I) choice of securities held in the portfolio II) return of each security given a particular economic state III) portfolio weight assigned to each security IV) probability of each economic state occurring

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behaviour and Market Efficiency

Behavioural Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Return, Risk and Security Management

Performance Evaluation and Risk Management

Options

Option Valuation

Futures Contracts

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds and Mortgaged-Backed Securities

International Portfolio Investment

Filters

The minimum correlation is and the maximum correlation is .