Question 1

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.

Accepted Answer

A)  the realized return 
B)  the highest return 
C)  the lowest return 
D)  the expected return 
A)  the realized return 
B)  the highest return 
C)  the lowest return 
D)  the expected return

Question 2

By combining stocks into a portfolio,we reduce risk through

Accepted Answer

A)  higher expected return. 
B)  higher rate of return. 
C)  higher average return. 
D)  diversification. 
A)  higher expected return. 
B)  higher rate of return. 
C)  higher average return. 
D)  diversification.

Question 3

Use the table for the question(s) below.
Consider the following returns:  
-The correlation between Lowes' and IBM's returns is closest to:

Accepted Answer

A)  0.71 
B)  0.60 
C)  0.62 
D)  0.05 
A)  0.71 
B)  0.60 
C)  0.62 
D)  0.05

Question 4

Use the information for the question(s) below.
Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 10%. The efficient (tangent) portfolio has an expected return of 17% and a volatility of 12%. The risk-free rate of interest is 5%.
-The Sharpe ratio for the efficient portfolio is closest to:

Accepted Answer

A)  0.7 
B)  1.0 
C)  1.4 
D)  1.2 
A)  0.7 
B)  1.0 
C)  1.4 
D)  1.2

Question 5

A portfolio is efficient if and only if the expected return of every available security equals its ________.

Accepted Answer

A)  average return 
B)  weighted average return 
C)  realized return 
D)  required return 
A)  average return 
B)  weighted average return 
C)  realized return 
D)  required return

Question 6

Which of the following equations is incorrect?

Accepted Answer

A)  xi =   
B)  Rp = Σi xiRi 
C)  Rp = x1R1 + x2R2 + ... + xnRn 
D)  E[Rp} = E[Σi xiRi] 
A)  xi =   
B)  Rp = Σi xiRi 
C)  Rp = x1R1 + x2R2 + ... + xnRn 
D)  E[Rp} = E[Σi xiRi]

Question 7

Use the table for the question(s) below.
Consider the following returns:  
-The volatility on Home Depot's returns is closest to:

Accepted Answer

A)  35% 
B)  31% 
C)  42% 
D)  18% 
A)  35% 
B)  31% 
C)  42% 
D)  18%

Question 8

The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face ________ risks and their prices move together.

Accepted Answer

A)  common 
B)  independent 
C)  firm-specific 
D)  unique 
A)  common 
B)  independent 
C)  firm-specific 
D)  unique

Question 9

Both conservative and aggressive investors will choose to hold the same portfolio of risky assets,

Accepted Answer

A)  the risk-free investment. 
B)  the tangent portfolio. 
C)  the inefficient portfolio. 
D)  the risk-equal portfolio. 
A)  the risk-free investment. 
B)  the tangent portfolio. 
C)  the inefficient portfolio. 
D)  the risk-equal portfolio.

Question 10

Which of the following statements is false?

Accepted Answer

A)  While the sign of the correlation is easy to interpret, its magnitude is not. 
B)  Independent risks are uncorrelated. 
C)  When the covariance equals 0, the returns are uncorrelated. 
D)  To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together. 
A)  While the sign of the correlation is easy to interpret, its magnitude is not. 
B)  Independent risks are uncorrelated. 
C)  When the covariance equals 0, the returns are uncorrelated. 
D)  To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together.

Question 11

Use the table for the question(s) below.
Consider the following returns:  
-The variance on a portfolio that is made up of equal investments in Lowes and IBM stock is closest to:

Accepted Answer

A)  0.62 
B)  0.05 
C)  0.12 
D)  0.06 
A)  0.62 
B)  0.05 
C)  0.12 
D)  0.06

Question 12

Which of the following equations is incorrect?

Accepted Answer

A)  E[Rxp] = rf + x(E[Rp] - rf) 
B)  E[Rxp] = (1 - x)rf + xE[Rp] 
C)  Sharpe ratio =   
D)  SD( Rxp) = xSD(Rp) 
A)  E[Rxp] = rf + x(E[Rp] - rf) 
B)  E[Rxp] = (1 - x)rf + xE[Rp] 
C)  Sharpe ratio =   
D)  SD( Rxp) = xSD(Rp)

Question 13

The relationship between risk and return for individual securities becomes evident only when we measure ________.

Accepted Answer

A)  market return rather than total return 
B)  market risk rather than total risk 
C)  expected return rather than required return 
D)  risk level rather than return 
A)  market return rather than total return 
B)  market risk rather than total risk 
C)  expected return rather than required return 
D)  risk level rather than return

Question 14

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:  
-Consider a portfolio consisting of only Duke Energy and Microsoft.The percentage of your investment (portfolio weight)that you would place in Duke Energy stock to achieve a risk-free investment would be closest to:

Accepted Answer

A)  15% 
B)  4% 
C)  23% 
D)  10% 
A)  15% 
B)  4% 
C)  23% 
D)  10%

Question 15

Which of the following statements is false?

Accepted Answer

A)  Stock returns will tend to move together if they are affect similarly by economic events. 
B)  Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C)  Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. 
D)  With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be. 
A)  Stock returns will tend to move together if they are affect similarly by economic events. 
B)  Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C)  Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. 
D)  With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be.

Question 16

Use the information for the question(s) below.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share.
-The weight on Lowes in your portfolio is:

Accepted Answer

A)  40% 
B)  20% 
C)  50% 
D)  30% 
A)  40% 
B)  20% 
C)  50% 
D)  30%

Question 17

Use the information for the question(s) below.
Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 10%. The efficient (tangent) portfolio has an expected return of 17% and a volatility of 12%. The risk-free rate of interest is 5%.
-Suppose that you want to maximize your expected return without increasing your risk.How can you achieve this goal? Without increasing your risk,what is the maximum expected return you can expect?

Accepted Answer

By investing in a combination of the ris

Question 18

Which of the following statements is false?

Accepted Answer

A)  Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier. 
B)  To arrive at the best possible set of risk and return opportunities, we should keep adding stocks until all investment opportunities are represented. 
C)  We say a portfolio is short for those stocks that have negative portfolio weights. 
D)  Adding new investment opportunities allows for greater diversification and improves the efficient frontier. 
A)  Graphically, the efficient portfolios are those on the northeast edge of the set of possible portfolios, an area which we call the efficient frontier. 
B)  To arrive at the best possible set of risk and return opportunities, we should keep adding stocks until all investment opportunities are represented. 
C)  We say a portfolio is short for those stocks that have negative portfolio weights. 
D)  Adding new investment opportunities allows for greater diversification and improves the efficient frontier.

Question 19

Which of the following statements is false?

Accepted Answer

A)  When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. 
B)  An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C)  When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. 
D)  Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns. 
A)  When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. 
B)  An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C)  When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. 
D)  Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Question 20

Which of the following statements is false?

Accepted Answer

A)  The expected return of a portfolio is equal to the weighted average expected return, but the volatility of a portfolio is less than the weighted average volatility. 
B)  Each security contributes to the volatility of the portfolio according to its volatility, scaled by its covariance with the portfolio, which adjusts for the fraction of the total risk that is common to the portfolio. 
C)  Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification. 
D)  The overall variability of the portfolio depends on the total co-movement of the stocks within it. 
A)  The expected return of a portfolio is equal to the weighted average expected return, but the volatility of a portfolio is less than the weighted average volatility. 
B)  Each security contributes to the volatility of the portfolio according to its volatility, scaled by its covariance with the portfolio, which adjusts for the fraction of the total risk that is common to the portfolio. 
C)  Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification. 
D)  The overall variability of the portfolio depends on the total co-movement of the stocks within it.

Exam 11: Optimal Portfolio Choice and the Capital Asset Pricing Model

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.

By combining stocks into a portfolio,we reduce risk through

Use the table for the question(s) below. Consider the following returns: -The correlation between Lowes' and IBM's returns is closest to:

A portfolio is efficient if and only if the expected return of every available security equals its ________.

Which of the following equations is incorrect?

Use the table for the question(s) below. Consider the following returns: -The volatility on Home Depot's returns is closest to:

The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face ________ risks and their prices move together.

Both conservative and aggressive investors will choose to hold the same portfolio of risky assets,

Which of the following statements is false?

Use the table for the question(s) below. Consider the following returns: -The variance on a portfolio that is made up of equal investments in Lowes and IBM stock is closest to:

Which of the following equations is incorrect?

The relationship between risk and return for individual securities becomes evident only when we measure ________.

Which of the following statements is false?

Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. -The weight on Lowes in your portfolio is:

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Bonds

Valuing Stocks

Capital Markets and the Pricing of Risk

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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