Question 1

An investor has $800 invested in Stock X and $1,300 invested in Stock Y. What is the portfolio weight of Stock Y?

Accepted Answer

A)  41% 
B)  38% 
C)  27% 
D)  33% 
E)  62%

Question 2

Stock S has an expected return of 8 percent and a standard deviation of 20 percent. Stock B has an expected return of 3 percent and a standard deviation of 12 percent. If the correlation of the two stocks is 0.15, what is the weight of Stock S in the minimum variance portfolio?

Accepted Answer

A)  0.287 
B)  0.236 
C)  0.368 
D)  0.229 
E)  0.410

Question 3

$\begin{array}{c}
\begin{array}{c}
\underline{\text {State of the economy}}\
\text {Boom}\
\text {Normal}\
\text {Recession}
\end{array}
\begin{array}{c}
\underline{\text {Probability}}\
.4\
.3 \
.3 
\end{array}
\begin{array}{c}
\underline{\text {Stock R}}\
32 \% \
10 \% \
-9 \%
\end{array}
\end{array}$
 
-What is the standard deviation of Stock R?

Accepted Answer

A)  17.10% 
B)  26.82% 
C)  21.85% 
D)  14.28% 
E)  23.43%

Question 4

The __________ return is the average projected return of an asset in different states of the economy.

Accepted Answer

A)  Variable 
B)  Realized 
C)  Portfolio 
D)  Expected 
E)  Potential

Question 5

For the standard deviation of a minimum variance portfolio of two assets to be zero, the correlation between the assets must be __________.

Accepted Answer

A)  - 100 
B)  - 1 
C)  0 
D)  + 1 
E)  + 100

Question 6

Stocks D, E and F have standard deviations of 2 percent, 10 percent and 40 percent, respectively. The correlation coefficients between the stocks are as follows: 0.4 for D and E, -0.4 for D and F, and -0.2 E and F. What is the standard deviation of a portfolio with a mix of 30-30-40 percent in D, E and F?

Accepted Answer

A)  15.49% 
B)  13.35% 
C)  14.07% 
D)  19.52%

Question 7

A correlation coefficient of __________ indicates a perfect positive correlation.

Accepted Answer

A)  0 
B)  0.5 
C)  1 
D)  10 
E)  100

Question 8

A portfolio that plots below the minimum variance portfolio is __________.

Accepted Answer

A)  dominant 
B)  inefficient 
C)  correlated 
D)  optimal 
E)  redundant

Question 9

$\begin{array}{c}
\begin{array}{c}
\underline{\text {State of the economy}}\
\text {Boom}\
\text {Normal}\
\text {Recession}
\end{array}
\begin{array}{c}
\underline{\text {Probability}}\
.3\
.4 \
.3 
\end{array}
\begin{array}{c}
\underline{\text {Stock F}}\
65 \% \
14 \% \
-50 \%
\end{array}
\end{array}$
  
-What is the standard deviation of Stock F?

Accepted Answer

A)  50.86% 
B)  44.65% 
C)  41.37% 
D)  35.21% 
E)  23.06%

Question 10

Which of the following statements is false regarding the investment opportunity set of two assets?

Accepted Answer

A)  If the correlation is + 1, it is a straight line. 
B)  It graphically illustrates all possible portfolio combinations between the two assets. 
C)  It is a straight line if one of the assets is risk-free. 
D)  Assuming positive portfolio weights, it can never plot below the lowest expected return asset. 
E)  It is not applicable when the assets have a zero correlation.

Question 11

Which of the following portfolio values are weighted average?
I. Expected return
II. Standard deviation
III. Correlation
IV. Beta

Accepted Answer

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

Question 12

Which of the following is true given various states of the economy?

Accepted Answer

A)  The various economic states of the economy are generally equally likely to occur in any given year 
B)  Most stocks tend to have the same return regardless of the economic state 
C)  The expected state of the economy can have a major impact on the expected return on a portfolio 
D)  If the economy moves into a recession period from a normal period, all stocks will have lower expected returns 
E)  A change in the probability of a state of the economy occurring has no impact on the expected return on a portfolio of risky assets

Question 13

Two assets with a correlation coefficient of -1

Accepted Answer

A)  Will both have increasing returns at the same time 
B)  Will both have decreasing returns at the same time 
C)  Will have increasing returns for one when there are decreasing returns for the other 
D)  Will have decreasing returns in an economic boom 
E)  Will have increasing returns in an economic recession

Question 14

$\begin{array}{c}
\begin{array}{c}
\underline{\text {State of the economy}}\
\text {Boom}\
\text {Normal}\
\text {Recession}
\end{array}
\begin{array}{c}
\underline{\text {Probability}}\
.3\
.4 \
.3 
\end{array}
\begin{array}{c}
\underline{\text {Stock F}}\
65 \% \
14 \% \
-50 \%
\end{array}
\end{array}$
  
-If the risk-rate is 5.8 percent, what is the risk premium of Stock F?

Accepted Answer

A)  15.9% 
B)  5.25% 
C)  4.87% 
D)  4.30% 
E)  5.06%

Question 15

Stock G has a standard deviation of 49 percent, and Stock H has a standard deviation of 56 percent. The covariance between the two assets is 0.046. What is the standard deviation of a portfolio with 40 percent of its assets invested in Stock G?

Accepted Answer

A)  41.64% 
B)  33.35% 
C)  44.07% 
D)  39.52% 
E)  35.31%

Question 16

Which of the following statements is false regarding diversification?

Accepted Answer

A)  Adding assets will always reduce risk. 
B)  Diversification works because some risks are not common to all assets. 
C)  Diversification benefits occur most when the assets have a low correlation. 
D)  The market is a completely diversified portfolio. 
E)  A diversified portfolio always has less risk than the highest risk asset assuming the correlation between the assets is less than one and the standard deviation of the assets is not the same.

Question 17

As the probabilities associated with the expected returns of an asset change, the standard deviation of the asset will:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  increase or decrease. 
E)  decrease if the expected return decreases.

Question 18

$\begin{array}{c}
\begin{array}{c}
\underline{\text {State of the economy}}\
\text {Boom}\
\text {Normal}\
\text {Recession}
\end{array}
\begin{array}{c}
\underline{\text {Probability}}\
.4\
.3 \
.3 
\end{array}
\begin{array}{c}
\underline{\text {Stock R}}\
32 \% \
10 \% \
-9 \%
\end{array}
\end{array}$

-What is the expected return of Stock R?

Accepted Answer

A)  12.42% 
B)  14.11% 
C)  10.05% 
D)  13.10% 
E)  11.65%

Question 19

NEW A stock is projected to return 15% during economic booms, -4% during recessions and 8% otherwise. If reports indicate the probability of a recession has decreased, what would happen to the stock's expected return?

Accepted Answer

A)  There would be no change to the expected return. 
B)  The expected return would increase. 
C)  The expected return would decrease. 
D)  The expected return would increase or remain constant. 
E)  The expected return would decrease or remain constant.

Question 20

While the covariance between the two stocks, G and H, is 0.0357, the correlation coefficient is 0.17. Given Stock G has a standard deviation of 50 percent, what is the standard deviation of Stock H?

Accepted Answer

A)  49% 
B)  56% 
C)  24% 
D)  42% 
E)  61%

Exam 2: Diversification and Risky Asset Allocation