Question 1

What is the variance of the expected returns on this stock?

Accepted Answer

A)  16.09 
B)  29.00 
C)  61.53 
D)  78.97 
E)  80.03 
A)  16.09 
B)  29.00 
C)  61.53 
D)  78.97 
E)  80.03 B

Question 2

Which one of the following statements must be true?

Accepted Answer

A)  All securities are projected to have higher rates of return when the economy booms versus when it is normal. 
B)  Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment. 
C)  The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession. 
D)  The total of the probabilities of the economic states can vary between zero and 100 percent. 
E)  Various economic states affect a portfolio's expected return but not the expected level of risk. 
A)  All securities are projected to have higher rates of return when the economy booms versus when it is normal. 
B)  Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment. 
C)  The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession. 
D)  The total of the probabilities of the economic states can vary between zero and 100 percent. 
E)  Various economic states affect a portfolio's expected return but not the expected level of risk. B

Question 3

Non-diversifiable risk:

Accepted Answer

A)  can be cut almost in half by simply investing in 10 stocks provided each stock is in a different industry. 
B)  can almost be eliminated by investing in 35 diverse securities. 
C)  remains constant regardless of the number of securities held in a portfolio. 
D)  has little, if any, impact on the actual realized returns for a diversified portfolio. 
E)  should be ignored by investors. 
A)  can be cut almost in half by simply investing in 10 stocks provided each stock is in a different industry. 
B)  can almost be eliminated by investing in 35 diverse securities. 
C)  remains constant regardless of the number of securities held in a portfolio. 
D)  has little, if any, impact on the actual realized returns for a diversified portfolio. 
E)  should be ignored by investors. C

Question 4

Which one of the following returns is the average return you expect to earn in the future on a risky asset?

Accepted Answer

A)  realized return 
B)  expected return 
C)  market return 
D)  real return 
E)  adjusted return 
A)  realized return 
B)  expected return 
C)  market return 
D)  real return 
E)  adjusted return

Question 5

You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph?

Accepted Answer

A)  Risk-taking investors should select the minimum variance portfolio. 
B)  Risk-averse investors should select the portfolio with the lowest rate of return. 
C)  Some portfolios will be efficient while others will not. 
D)  The minimum variance portfolio will have the lowest portfolio expected return of any of the possible portfolios. 
E)  All possible portfolios will graph as efficient portfolios. 
A)  Risk-taking investors should select the minimum variance portfolio. 
B)  Risk-averse investors should select the portfolio with the lowest rate of return. 
C)  Some portfolios will be efficient while others will not. 
D)  The minimum variance portfolio will have the lowest portfolio expected return of any of the possible portfolios. 
E)  All possible portfolios will graph as efficient portfolios.

Question 6

To reduce risk as much as possible, you should combine assets which have which one of the following correlation relationships?

Accepted Answer

A)  strong positive 
B)  slightly positive 
C)  slightly negative 
D)  strongly negative 
E)  zero 
A)  strong positive 
B)  slightly positive 
C)  slightly negative 
D)  strongly negative 
E)  zero

Question 7

The value of an individual security divided by the portfolio value is referred to as the portfolio:

Accepted Answer

A)  beta. 
B)  standard deviation. 
C)  balance. 
D)  weight. 
E)  variance. 
A)  beta. 
B)  standard deviation. 
C)  balance. 
D)  weight. 
E)  variance.

Question 8

What is the standard deviation of the returns on this stock?

Accepted Answer

A)  16.94 percent 
B)  17.08 percent 
C)  17.17 percent 
D)  17.59 percent 
E)  17.90 percent 
A)  16.94 percent 
B)  17.08 percent 
C)  17.17 percent 
D)  17.59 percent 
E)  17.90 percent

Question 9

Which of the following affect the expected rate of return for a portfolio?
I. weight of each security held in the portfolio
II. the probability of various economic states occurring
III. the variance of each individual security
IV. the expected rate of return of each security given each economic state

Accepted Answer

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

Question 10

Where does the minimum variance portfolio lie in respect to the investment opportunity set?

Accepted Answer

A)  lowest point 
B)  highest point 
C)  most leftward point 
D)  most rightward point 
E)  exact center 
A)  lowest point 
B)  highest point 
C)  most leftward point 
D)  most rightward point 
E)  exact center

Question 11

You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds. Which one of the following must be true if you change the asset allocation?

Accepted Answer

A)  The expected return will remain constant. 
B)  The revised portfolio will be perfectly negatively correlated with the initial portfolio. 
C)  The two portfolios could have significantly different standard deviations. 
D)  The portfolio variance will be unaffected. 
E)  The portfolio variance will most likely decrease in value. 
A)  The expected return will remain constant. 
B)  The revised portfolio will be perfectly negatively correlated with the initial portfolio. 
C)  The two portfolios could have significantly different standard deviations. 
D)  The portfolio variance will be unaffected. 
E)  The portfolio variance will most likely decrease in value.

Question 12

What is the correlation coefficient of two assets that are uncorrelated?

Accepted Answer

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

Question 13

How will the returns on two assets react if those returns have a perfect positive correlation?
I. move in the same direction
II. move in opposite directions
III. move by the same amount
IV. move by either equal or unequal amounts

Accepted Answer

A)  I and III only 
B)  I and IV only 
C)  II and III only 
D)  II and IV only 
E)  III only 
A)  I and III only 
B)  I and IV only 
C)  II and III only 
D)  II and IV only 
E)  III only

Question 14

As the number of individual stocks in a portfolio increases, the portfolio standard deviation:

Accepted Answer

A)  increases at a constant rate. 
B)  remains unchanged. 
C)  decreases at a constant rate. 
D)  decreases at a diminishing rate. 
E)  decreases at an increasing rate. 
A)  increases at a constant rate. 
B)  remains unchanged. 
C)  decreases at a constant rate. 
D)  decreases at a diminishing rate. 
E)  decreases at an increasing rate.

Question 15

Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance?

Accepted Answer

A)  .02022 
B)  .02156 
C)  .02239 
D)  .02247 
E)  .02350 
A)  .02022 
B)  .02156 
C)  .02239 
D)  .02247 
E)  .02350

Question 16

Assume the returns on Stock X were positive in January, February, April, July, and November. The other months the returns on Stock X were negative. The returns on Stock Y were positive in January, April, May, July, August, and October and negative the remaining months. Which one of the following correlation coefficients best describes the relationship between Stock X and Stock Y?

Accepted Answer

A)  -1.0 
B)  -0.5 
C)  0.0 
D)  0.5 
E)  1.0 
A)  -1.0 
B)  -0.5 
C)  0.0 
D)  0.5 
E)  1.0

Question 17

A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent. The correlation of the two funds is .11. What is the weight of the stock fund in the minimum variance portfolio?

Accepted Answer

A)  3.47 percent 
B)  6.48 percent 
C)  11.92 percent 
D)  14.67 percent 
E)  18.22 percent 
A)  3.47 percent 
B)  6.48 percent 
C)  11.92 percent 
D)  14.67 percent 
E)  18.22 percent

Question 18

Which one of the following distinguishes a minimum variance portfolio?

Accepted Answer

A)  lowest risk portfolio of any possible portfolio given the same securities but in differing proportions 
B)  lowest risk portfolio possible given any specified expected rate of return 
C)  the zero risk portfolio created by maximizing the asset allocation mix 
D)  any portfolio with an expected standard deviation of 9 percent or less 
E)  any portfolio created with securities that are evenly weighted in respect to the asset allocation mix 
A)  lowest risk portfolio of any possible portfolio given the same securities but in differing proportions 
B)  lowest risk portfolio possible given any specified expected rate of return 
C)  the zero risk portfolio created by maximizing the asset allocation mix 
D)  any portfolio with an expected standard deviation of 9 percent or less 
E)  any portfolio created with securities that are evenly weighted in respect to the asset allocation mix

Question 19

What is the variance of the expected returns on this stock?

Accepted Answer

A)  1.21 
B)  1.42 
C)  1.56 
D)  3.84 
E)  4.03 
A)  1.21 
B)  1.42 
C)  1.56 
D)  3.84 
E)  4.03

Question 20

Which of the following are affected by the probability of a state of the economy occurring?
I. expected return of an individual security
II. expected return of a portfolio
III. standard deviation of an individual security
IV. standard deviation of a portfolio

Accepted Answer

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

What is the variance of the expected returns on this stock?

Which one of the following statements must be true?

Non-diversifiable risk:

Which one of the following returns is the average return you expect to earn in the future on a risky asset?

You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph?

To reduce risk as much as possible, you should combine assets which have which one of the following correlation relationships?

The value of an individual security divided by the portfolio value is referred to as the portfolio:

What is the standard deviation of the returns on this stock?

Where does the minimum variance portfolio lie in respect to the investment opportunity set?

You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds. Which one of the following must be true if you change the asset allocation?

What is the correlation coefficient of two assets that are uncorrelated?

How will the returns on two assets react if those returns have a perfect positive correlation? I. move in the same direction II. move in opposite directions III. move by the same amount IV. move by either equal or unequal amounts

As the number of individual stocks in a portfolio increases, the portfolio standard deviation:

Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance?

A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent. The correlation of the two funds is .11. What is the weight of the stock fund in the minimum variance portfolio?

Which one of the following distinguishes a minimum variance portfolio?

What is the variance of the expected returns on this stock?

Which of the following are affected by the probability of a state of the economy occurring? I. expected return of an individual security II. expected return of a portfolio III. standard deviation of an individual security IV. standard deviation of a portfolio

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds

Mortgage-Backed Securities

Filters

Exam 11: Diversification and Risky Asset Allocation

What is the variance of the expected returns on this stock?

Which one of the following statements must be true?

Non-diversifiable risk:

Which one of the following returns is the average return you expect to earn in the future on a risky asset?

You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph?

To reduce risk as much as possible, you should combine assets which have which one of the following correlation relationships?

The value of an individual security divided by the portfolio value is referred to as the portfolio:

What is the standard deviation of the returns on this stock?

Where does the minimum variance portfolio lie in respect to the investment opportunity set?

You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds. Which one of the following must be true if you change the asset allocation?

What is the correlation coefficient of two assets that are uncorrelated?

How will the returns on two assets react if those returns have a perfect positive correlation? I. move in the same direction II. move in opposite directions III. move by the same amount IV. move by either equal or unequal amounts

As the number of individual stocks in a portfolio increases, the portfolio standard deviation:

Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance?

A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent. The correlation of the two funds is .11. What is the weight of the stock fund in the minimum variance portfolio?

Which one of the following distinguishes a minimum variance portfolio?

What is the variance of the expected returns on this stock?

Which of the following are affected by the probability of a state of the economy occurring? I. expected return of an individual security II. expected return of a portfolio III. standard deviation of an individual security IV. standard deviation of a portfolio

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds

Mortgage-Backed Securities

Filters