Question 1

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

Accepted Answer

A)  efficient return 
B)  correlated value 
C)  risk premium 
D)  expected return 
E)  realized return 
A)  efficient return 
B)  correlated value 
C)  risk premium 
D)  expected return 
E)  realized return

Question 2

If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:

Accepted Answer

A)  zero. 
B)  the risk-free rate. 
C)  the market rate. 
D)  the market rate minus the risk-free rate. 
E)  the risk-free rate plus one-half the market rate. 
A)  zero. 
B)  the risk-free rate. 
C)  the market rate. 
D)  the market rate minus the risk-free rate. 
E)  the risk-free rate plus one-half the market rate.

Question 3

You have a portfolio which is comprised of 48 percent of stock A and 52 percent of stock B. What is the standard deviation of this portfolio?

Accepted Answer

A)  1.98 percent 
B)  2.06 percent 
C)  2.13 percent 
D)  2.27 percent 
E)  2.30 percent 
A)  1.98 percent 
B)  2.06 percent 
C)  2.13 percent 
D)  2.27 percent 
E)  2.30 percent

Question 4

You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct?

Accepted Answer

A)  There is no risk premium on Security C. 
B)  The risk premium on Security A exceeds that of Security B. 
C)  Security B has a risk premium that is 50 percent greater than Security A's risk premium. 
D)  The risk premium on Security C is 5 percent. 
E)  All three securities have the same expected risk premium. 
A)  There is no risk premium on Security C. 
B)  The risk premium on Security A exceeds that of Security B. 
C)  Security B has a risk premium that is 50 percent greater than Security A's risk premium. 
D)  The risk premium on Security C is 5 percent. 
E)  All three securities have the same expected risk premium.

Question 5

Which one of the following statements is correct concerning asset allocation?

Accepted Answer

A)  Because there is an ideal mix, all investors should use the same asset allocation for their portfolios. 
B)  The minimum variance portfolio will have a 50/50 asset allocation between stocks and bonds. 
C)  Asset allocation affects the expected return but not the risk level of a portfolio. 
D)  There is an ideal asset allocation between stocks and bonds given a specified level of risk. 
E)  Asset allocation should play a minor role in portfolio construction. 
A)  Because there is an ideal mix, all investors should use the same asset allocation for their portfolios. 
B)  The minimum variance portfolio will have a 50/50 asset allocation between stocks and bonds. 
C)  Asset allocation affects the expected return but not the risk level of a portfolio. 
D)  There is an ideal asset allocation between stocks and bonds given a specified level of risk. 
E)  Asset allocation should play a minor role in portfolio construction.

Question 6

Which one of the following correlation relationships has the potential to completely eliminate risk?

Accepted Answer

A)  perfectly positive 
B)  positive 
C)  negative 
D)  perfectly negative 
E)  uncorrelated 
A)  perfectly positive 
B)  positive 
C)  negative 
D)  perfectly negative 
E)  uncorrelated

Question 7

Which of the following will increase the expected risk premium for a security, all else constant?
I. an increase in the security's expected return
II. a decrease in the security's expected return
III. an increase in the risk-free rate
IV. a decrease in the risk-free rate

Accepted Answer

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

Question 8

The division of a portfolio's dollars among various types of assets is referred to as:

Accepted Answer

A)  the minimum variance portfolio. 
B)  the efficient frontier. 
C)  correlation. 
D)  asset allocation. 
E)  setting the investment opportunities. 
A)  the minimum variance portfolio. 
B)  the efficient frontier. 
C)  correlation. 
D)  asset allocation. 
E)  setting the investment opportunities.

Question 9

A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities.

Accepted Answer

A)  the lowest return for any given level of risk 
B)  the largest number of potential portfolios that can achieve a specific rate of return 
C)  the largest number of potential portfolios that can achieve a specific level of risk 
D)  a positive rate of return and a zero standard deviation 
E)  the lowest risk for any given rate of return 
A)  the lowest return for any given level of risk 
B)  the largest number of potential portfolios that can achieve a specific rate of return 
C)  the largest number of potential portfolios that can achieve a specific level of risk 
D)  a positive rate of return and a zero standard deviation 
E)  the lowest risk for any given rate of return

Question 10

You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the expected rate of return on this portfolio?

Accepted Answer

A)  11.76 percent 
B)  11.88 percent 
C)  12.44 percent 
D)  12.56 percent 
E)  12.85 percent 
A)  11.76 percent 
B)  11.88 percent 
C)  12.44 percent 
D)  12.56 percent 
E)  12.85 percent

Question 11

A portfolio consists of the following securities. What is the portfolio weight of stock B?

Accepted Answer

A)  .429 
B)  .459 
C)  .482 
D)  .506 
E)  .521 
A)  .429 
B)  .459 
C)  .482 
D)  .506 
E)  .521

Question 12

You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is the standard deviation of this portfolio?

Accepted Answer

A)  4.39 percent 
B)  5.68 percent 
C)  6.17 percent 
D)  7.14 percent 
E)  9.08 percent 
A)  4.39 percent 
B)  5.68 percent 
C)  6.17 percent 
D)  7.14 percent 
E)  9.08 percent

Question 13

Diversification is investing in a variety of assets with which one of the following as the primary goal?

Accepted Answer

A)  increasing returns 
B)  minimizing taxes 
C)  reducing some risks 
D)  eliminating all risks 
E)  increasing the variance 
A)  increasing returns 
B)  minimizing taxes 
C)  reducing some risks 
D)  eliminating all risks 
E)  increasing the variance

Question 14

Rosita owns a stock with an overall expected return of 14.40 percent. The economy is expected to either boom or be normal. There is a 48 percent chance the economy will boom. If the economy booms, this stock is expected to return 15 percent. What is the expected return on the stock if the economy is normal?

Accepted Answer

A)  12.00 percent 
B)  12.83 percent 
C)  13.15 percent 
D)  13.85 percent 
E)  14.40 percent 
A)  12.00 percent 
B)  12.83 percent 
C)  13.15 percent 
D)  13.85 percent 
E)  14.40 percent

Question 15

A stock fund has a standard deviation of 18 percent and a bond fund has a standard deviation of 11 percent. The correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum variance portfolio?

Accepted Answer

A)  16 percent 
B)  19 percent 
C)  21 percent 
D)  24 percent 
E)  27 percent 
A)  16 percent 
B)  19 percent 
C)  21 percent 
D)  24 percent 
E)  27 percent

Question 16

The risk-free rate is 3.15 percent. What is the expected risk premium on this stock given the following information?

Accepted Answer

A)  5.85 percent 
B)  6.59 percent 
C)  8.22 percent 
D)  10.87 percent 
E)  11.21 percent 
A)  5.85 percent 
B)  6.59 percent 
C)  8.22 percent 
D)  10.87 percent 
E)  11.21 percent

Question 17

You have a portfolio which is comprised of 75 percent of stock A and 25 percent of stock B. What is the expected rate of return on this portfolio?

Accepted Answer

A)  10.70 percent 
B)  10.87 percent 
C)  11.13 percent 
D)  12.11 percent 
E)  12.80 percent 
A)  10.70 percent 
B)  10.87 percent 
C)  11.13 percent 
D)  12.11 percent 
E)  12.80 percent

Question 18

What is the variance of the returns on a security given the following information?

Accepted Answer

A)  239.77 
B)  284.05 
C)  321.16 
D)  347.15 
E)  362.98 
A)  239.77 
B)  284.05 
C)  321.16 
D)  347.15 
E)  362.98

Question 19

A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio?

Accepted Answer

A)  100 percent stocks 
B)  100 percent bonds 
C)  50/50 mix of stocks and bonds 
D)  30 percent stocks and 70 percent bonds 
E)  30 percent bonds and 70 percent stocks 
A)  100 percent stocks 
B)  100 percent bonds 
C)  50/50 mix of stocks and bonds 
D)  30 percent stocks and 70 percent bonds 
E)  30 percent bonds and 70 percent stocks

Question 20

Stock X has a standard deviation of 21 percent per year and stock Y has a standard deviation of 6 percent per year. The correlation between stock A and stock B is .38. You have a portfolio of these two stocks wherein stock X has a portfolio weight of 42 percent. What is your portfolio standard deviation?

Accepted Answer

A)  8.89 percent 
B)  9.85 percent 
C)  10.64 percent 
D)  11.84 percent 
E)  12.92 percent 
A)  8.89 percent 
B)  9.85 percent 
C)  10.64 percent 
D)  11.84 percent 
E)  12.92 percent

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

If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:

You have a portfolio which is comprised of 48 percent of stock A and 52 percent of stock B. What is the standard deviation of this portfolio?

You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct?

Which one of the following statements is correct concerning asset allocation?

Which one of the following correlation relationships has the potential to completely eliminate risk?

Which of the following will increase the expected risk premium for a security, all else constant? I. an increase in the security's expected return II. a decrease in the security's expected return III. an increase in the risk-free rate IV. a decrease in the risk-free rate

The division of a portfolio's dollars among various types of assets is referred to as:

A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities.

You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the expected rate of return on this portfolio?

A portfolio consists of the following securities. What is the portfolio weight of stock B?

You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is the standard deviation of this portfolio?

Diversification is investing in a variety of assets with which one of the following as the primary goal?

A stock fund has a standard deviation of 18 percent and a bond fund has a standard deviation of 11 percent. The correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum variance portfolio?

The risk-free rate is 3.15 percent. What is the expected risk premium on this stock given the following information?

You have a portfolio which is comprised of 75 percent of stock A and 25 percent of stock B. What is the expected rate of return on this portfolio?

What is the variance of the returns on a security given the following information?

A portfolio comprised of which one of the following is most apt to be the minimum variance 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 extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called?

If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:

You have a portfolio which is comprised of 48 percent of stock A and 52 percent of stock B. What is the standard deviation of this portfolio?

You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct?

Which one of the following statements is correct concerning asset allocation?

Which one of the following correlation relationships has the potential to completely eliminate risk?

Which of the following will increase the expected risk premium for a security, all else constant? I. an increase in the security's expected return II. a decrease in the security's expected return III. an increase in the risk-free rate IV. a decrease in the risk-free rate

The division of a portfolio's dollars among various types of assets is referred to as:

A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities.

You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the expected rate of return on this portfolio?

A portfolio consists of the following securities. What is the portfolio weight of stock B?

You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is the standard deviation of this portfolio?

Diversification is investing in a variety of assets with which one of the following as the primary goal?

A stock fund has a standard deviation of 18 percent and a bond fund has a standard deviation of 11 percent. The correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum variance portfolio?

The risk-free rate is 3.15 percent. What is the expected risk premium on this stock given the following information?

You have a portfolio which is comprised of 75 percent of stock A and 25 percent of stock B. What is the expected rate of return on this portfolio?

What is the variance of the returns on a security given the following information?

A portfolio comprised of which one of the following is most apt to be the minimum variance 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