Exam 6: Efficient Diversification

The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05.If the covariance of returns on A and B is .0030,the correlation coefficient between the returns on A and B is _________.

The risk that can be diversified away is __________.

Which of the following provides the best example of a systematic risk event?

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 stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. -The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

Semitool Corp has an expected excess return of 6% for next year.However for every unexpected 1% change in the market,Semitool's return responds by a factor of 1.2.Suppose it turns out the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated,pushing up the stock price by another 1%.Based on this information what was Semitool's actual excess return?

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock 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 expected return on the optimal risky portfolio is _________.

Decreasing the number of stocks in a portfolio from 50 to 10 would likely _________________________.

A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half your money.What is the expected return on this investment project?

The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04.If the correlation coefficient between the returns on A and B is -.50,the covariance of returns on A and B 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?

Asset A has an expected return of 15% and a reward-to-variability ratio of .4.Asset B has an expected return of 20% and a reward-to-variability ratio of .3.A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?

Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?

The term excess-return refers to ______________.

Risk that can be eliminated through diversification is called ______ risk.

The term "complete portfolio" refers to a portfolio consisting of _________________.

Firm specific risk is also called __________ and __________.

A security's beta coefficient will be negative if ____________.

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. -Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well diversified portfolio of common stock?