Question 1

Two securities have a covariance of 0.076. If their respective standard deviations are 13% and 22%, what is their correlation coefficient?

Accepted Answer

A)  0.22 
B)  0.38 
C)  0.58 
D)  0.72 
E)  0.95

Question 2

The risk that can be diversified away in a portfolio is referred to as ___________. I) diversifiable riskII) unique riskIII) systematic riskIV) firm-specific risk

Accepted Answer

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

Question 3

Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky securities?I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance.II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.III) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

Accepted Answer

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

Question 4

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

Accepted Answer

A)  the assets have a correlation coefficient less than zero. 
B)  the assets have a correlation coefficient equal to zero. 
C)  the assets have a correlation coefficient greater than zero. 
D)  the assets have a correlation coefficient equal to one. 
E)  the assets have a correlation coefficient less than one.

Question 5

Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Accepted Answer

A)  0.64 
B)  0.39 
C)  0.08 
D)  0.13 
E)  0.36

Question 6

Two securities have a covariance of 0.092. If their respective standard deviations are 23% and 31%, what is their correlation coefficient?

Accepted Answer

A)  0.32 
B)  0.45 
C)  0.78 
D)  0.82 
E)  0.95

Question 7

The standard deviation of a portfolio of risky securities is

Accepted Answer

A)  the square root of the weighted sum of the securities' variances. 
B)  the square root of the sum of the securities' variances. 
C)  the square root of the weighted sum of the securities' variances and covariances. 
D)  the square root of the sum of the securities' covariances.

Question 8

Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$

If you invest 25% of your money in C and 75% in D, what would be your portfolio's expected rate of return and standard deviation?

Accepted Answer

A)  9.891%; 8.70% 
B)  9.945%; 11.12% 
C)  8.225%; 8.70% 
D)  10.275%; 11.12%

Question 9

Nonsystematic risk is also referred to as

Accepted Answer

A)  market riskor diversifiable risk. 
B)  firm-specific risk or market risk. 
C)  diversifiable risk or market risk. 
D)  diversifiable risk or unique risk.

Question 10

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. The risk-free portfolio that can be formed with the two securities will earn a(n) _____ rate of return.

Accepted Answer

A)  8.5% 
B)  9.0% 
C)  8.9% 
D)  9.9%

Question 11

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A}&\text { Return on Stock E } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 138 & 78 \
3 & 0.20 & 128 & 68 \
4 & 0.30 & 148 & 98 \
5 & 0.20 & 158 & 8 \%
\end{array}$
 The coefficient of correlation between A and B is (Do not round intermediate calcuations.)

Accepted Answer

A)  0.47. 
B)  0.60. 
C)  0.58. 
D)  1.20.

Question 12

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A}&\text {Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.20 & 12\% & 6\% \
4 & 0.30 & 14\% & 9\% \
5 & 0.20 & 15\% & 8 \%
\end{array}$
 If you invest 40% of your money in A and 60% in B, what would be your portfolio's expected rate of return and standard deviation?

Accepted Answer

A)  9.9%; 3% 
B)  9.9%; 1.1% 
C)  11%; 1.1% 
D)  11%; 3% 
E)  None of the options are correct.

Question 13

Security X has expected return of 14% and standard deviation of 22%. Security Y has expected return of 16% and standard deviation of 28%. If the two securities have a correlation coefficient of 0.8, what is their covariance?

Accepted Answer

A)  0.038 
B)  0.049 
C)  0.018 
D)  0.013 
E)  0.054

Question 14

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

Accepted Answer

A)  0.0. 
B)  1.0. 
C)  0.5. 
D)  −1.0. 
E)  any negative number.

Question 15

Security M has expected return of 17% and standard deviation of 28%. Security S has expected return of 13% and standard deviation of 15%. If the two securities have a correlation coefficient of 0.78, what is their covariance?

Accepted Answer

A)  0.018 
B)  0.029 
C)  0.033 
D)  0.045 
E)  0.054

Question 16

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A}&\text { Return on Stock E } \ 
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 138 & 78 \
3 & 0.20 & 128 & 68 \
4 & 0.30 & 148 & 98 \
5 & 0.20 & 158 & 8 \%
\end{array}$
 The standard deviations of stocks A and B are _____ and _____, respectively.

Accepted Answer

A)  1.5%; 1.9% 
B)  2.5%; 1.1% 
C)  3.2%; 2.0% 
D)  1.5%; 1.1%

Question 17

Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on the capital allocation line?I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.III) Investors choose the portfolio that maximizes their expected utility.

Accepted Answer

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

Question 18

Systematic risk is also referred to as

Accepted Answer

A)  market riskor nondiversifiable risk. 
B)  market riskor diversifiable risk. 
C)  unique riskor nondiversifiable risk. 
D)  unique riskor diversifiable risk. 
E)  None of the options are correct.

Question 19

Firm-specific risk is also referred to as

Accepted Answer

A)  systematic riskor diversifiable risk. 
B)  systematic riskor market risk. 
C)  diversifiable risk or market risk. 
D)  diversifiable risk or unique risk.

Question 20

Unique risk is also referred to as

Accepted Answer

A)  systematic risk or diversifiable risk. 
B)  systematic risk or market risk. 
C)  diversifiable risk or market risk. 
D)  diversifiable risk or firm-specific risk. 
E)  None of the options are correct.

Exam 7: Efficient Diversification