Question 1

Which of the following statements regarding expected return of a portfolio is true?

Accepted Answer

A)  It can be higher than the weighted average expected return of individual assets 
B)  It can be lower than the weighted average return of the individual assets 
C)  It can never be higher or lower than the weighted average expected return of individual assets 
D)  Expected return of a portfolio is impossible to calculate 
A)  It can be higher than the weighted average expected return of individual assets 
B)  It can be lower than the weighted average return of the individual assets 
C)  It can never be higher or lower than the weighted average expected return of individual assets 
D)  Expected return of a portfolio is impossible to calculate

Question 2

According to the Law of Large Numbers, the larger the sample size, the more likely it is that the sample mean will be close to the population expected value.

Accepted Answer

A) True 
 B)False

Question 3

Are the expected returns and standard deviation of a portfolio both weighted averages of the individual securities expected returns and standard deviations? If not, what other factors are required?

Accepted Answer

The expected return is a weigh

Question 4

Which of the following statements regarding portfolio risk and number of stocks is generally true?

Accepted Answer

A)  Adding more stocks increases risk 
B)  Adding more stocks decreases risk but does not eliminate it 
C)  Adding more stocks has no effect on risk 
D)  Adding more stocks increases only systematic risk 
A)  Adding more stocks increases risk 
B)  Adding more stocks decreases risk but does not eliminate it 
C)  Adding more stocks has no effect on risk 
D)  Adding more stocks increases only systematic risk

Question 5

Portfolio risk can be reduced by reducing portfolio weights for assets with positive correlations.

Accepted Answer

A) True 
 B)False

Question 6

How is the correlation coefficient important in choosing among securities for a portfolio?

Accepted Answer

If security returns are highly correlate

Question 7

With a continuous probability distribution,:

Accepted Answer

A)  a probability is assigned to each possible outcome. 
B)  possible outcomes are constantly changing. 
C)  an infinite number of possible outcomes exist. 
D)  there is no variance. 
A)  a probability is assigned to each possible outcome. 
B)  possible outcomes are constantly changing. 
C)  an infinite number of possible outcomes exist. 
D)  there is no variance.

Question 8

Calculate the risk (standard deviation) of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5. Variance Weight (in the portfolio)
$\begin{array} { l l l } 
\text { Variance } & & \text { Weight (in the portfolio) } \
\hline \text { Security A } & 10 & 0.3 \
\text { Security B } & 20 & 0.7
\end{array}$

Accepted Answer

A)  17.0 percent 
B)  5.4 percent 
C)  2.0 percent   
D)  3.7 percent 
A)  17.0 percent 
B)  5.4 percent 
C)  2.0 percent   
D)  3.7 percent

Question 9

When returns are perfectly positively correlated, the risk of the portfolio is:

Accepted Answer

A)  zero 
B)  the weighted average of the individual securities risk 
C)  equal to the correlation coefficient between the securities 
D)  infinite 
A)  zero 
B)  the weighted average of the individual securities risk 
C)  equal to the correlation coefficient between the securities 
D)  infinite

Question 10

Investments in commodities such as precious metals may provide additional
diversification opportunities for portfolios consisting primarily of stocks and bonds.

Accepted Answer

A) True 
 B)False

Question 11

Portfolio risk is a weighted average of the individual security risks.

Accepted Answer

A) True 
 B)False

Question 12

A probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements regarding the correlation coefficient is not true?

Accepted Answer

A)  It is a statistical measure 
B)  It measure the relationship between two securities' returns 
C)  It determines the causes of the relationship between two securities' returns 
D)  It is greater than or equal to -1 and less than or equal to +1 
A)  It is a statistical measure 
B)  It measure the relationship between two securities' returns 
C)  It determines the causes of the relationship between two securities' returns 
D)  It is greater than or equal to -1 and less than or equal to +1

Question 14

Which of the following is true regarding the expected return of a portfolio?

Accepted Answer

A)  It is a weighted average only for stock portfolios 
B)  It can only be positive 
C)  It can never be above the highest individual asset return 
D)  It is always below the highest individual asset return 
A)  It is a weighted average only for stock portfolios 
B)  It can only be positive 
C)  It can never be above the highest individual asset return 
D)  It is always below the highest individual asset return

Question 15

Throwing a dart at the WSJ and selecting stocks on this basis would be considered random diversification.

Accepted Answer

A) True 
 B)False

Question 16

The major difference between the correlation coefficient and the covariance is that:

Accepted Answer

A)  the correlation coefficient can be positive, negative or zero while the covariance is always positive 
B)  the correlation coefficient measures relationship between securities and the covariance measures relationships between a security and the market 
C)  the correlation coefficient is a relative measure showing association between security returns and the covariance is an absolute measure showing association between security returns 
D)  the correlation coefficient is a geometric measure and the covariance is a statistical measure 
A)  the correlation coefficient can be positive, negative or zero while the covariance is always positive 
B)  the correlation coefficient measures relationship between securities and the covariance measures relationships between a security and the market 
C)  the correlation coefficient is a relative measure showing association between security returns and the covariance is an absolute measure showing association between security returns 
D)  the correlation coefficient is a geometric measure and the covariance is a statistical measure

Question 17

A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.

Accepted Answer

A) True 
 B)False

Question 18

When the covariance is positive, the correlation will be:

Accepted Answer

A)  positive 
B)  negative 
C)  zero 
D)  impossible to determine 
A)  positive 
B)  negative 
C)  zero 
D)  impossible to determine

Question 19

Which of the following is true regarding random diversification?

Accepted Answer

A)  Investment characteristics are considered important in random diversification 
B)  The benefits of random diversification eventually no longer continue as more securities are added 
C)  Random diversification, if done correctly, can eliminate all risk in a portfolio 
D)  Random diversification eventually removes all company specific risk from a portfolio 
A)  Investment characteristics are considered important in random diversification 
B)  The benefits of random diversification eventually no longer continue as more securities are added 
C)  Random diversification, if done correctly, can eliminate all risk in a portfolio 
D)  Random diversification eventually removes all company specific risk from a portfolio

Question 20

Conventional wisdom has long held that diversification of a stock portfolio should be across industries. Does the correlation coefficient indirectly recommend the same thing?

Accepted Answer

Correlation coefficients between securit

Exam 7: Portfolio Theory Is Universal

Which of the following statements regarding expected return of a portfolio is true?

According to the Law of Large Numbers, the larger the sample size, the more likely it is that the sample mean will be close to the population expected value.

Are the expected returns and standard deviation of a portfolio both weighted averages of the individual securities expected returns and standard deviations? If not, what other factors are required?

Which of the following statements regarding portfolio risk and number of stocks is generally true?

Portfolio risk can be reduced by reducing portfolio weights for assets with positive correlations.

How is the correlation coefficient important in choosing among securities for a portfolio?

With a continuous probability distribution,:

Calculate the risk (standard deviation) of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5. Variance Weight (in the portfolio) Variance Weight (in the portfolio) Security A 10 0.3 Security B 20 0.7

When returns are perfectly positively correlated, the risk of the portfolio is:

Investments in commodities such as precious metals may provide additional diversification opportunities for portfolios consisting primarily of stocks and bonds.

Portfolio risk is a weighted average of the individual security risks.

A probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes.

Which of the following statements regarding the correlation coefficient is not true?

Which of the following is true regarding the expected return of a portfolio?

Throwing a dart at the WSJ and selecting stocks on this basis would be considered random diversification.

The major difference between the correlation coefficient and the covariance is that:

A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.

When the covariance is positive, the correlation will be:

Which of the following is true regarding random diversification?

Conventional wisdom has long held that diversification of a stock portfolio should be across industries. Does the correlation coefficient indirectly recommend the same thing?

Investing Is an Important Activity Worldwide

Investment Alternatives: Generic Principles All Investors Must Know

Indirect Investing: a Global Activity

Securities Markets Matter to All Investors

All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

Portfolio Selection for All Investors

Asset Pricing Principles

Common Stock Valuation Lessons for All Investors

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

Fixed Income Securities Are Available Worldwide

Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Options

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

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