Question 1

What is the risk-free rate if there is a stock with a risk premium of 9.5 percent and the return of the stock is 19.9 percent?

Accepted Answer

A)  29.4% 
B)  10.4% 
C)  2.1% 
D)  8.7% 
E)  12.5%

Question 2

You have a three-stock portfolio. Stock A has an expected return of 12% and a standard deviations of 41%. Stock B has an expected return of 16% and a standard deviation of 58%. Stock C has an expected return of 13% and a standard deviation of 48%. The correlation coefficient between the Stocks A and B is 0.3, between Stocks A and C is 0.2, and between Stocks B and C is 0.05. Your portfolio consists of 30% Stock A, 50% Stock B and 20% Stock C. What is the standard deviation of this portfolio?

Accepted Answer

A)  35.97% 
B)  36.52% 
C)  34.75% 
D)  37.06% 
E)  38.21%

Question 3

Which of the following is false regarding the efficient frontier?

Accepted Answer

A)  A stock that lies above the efficient frontier is overvalued. 
B)  The efficient frontier includes stocks, bonds, and all other assets. 
C)  The efficient frontier may include individual stocks as well as portfolios. 
D)  A bond can lie on the efficient frontier. 
E)  All of the above are true.

Question 4

Explain why changes in economic outlook may cause an investor to change his asset allocation.

Accepted Answer

The answer of Explain why changes in economic outlook may...

Question 5

You have a portfolio with 200 shares of Stock A at a price of $34 and 300 shares of Stock B at a price of $28. What is the weight of Stock A in your portfolio?

Accepted Answer

A)  55% 
B)  41% 
C)  45% 
D)  51% 
E)  37%

Question 6

An asset on the Markowitz efficient frontier has:

Accepted Answer

A)  the greatest return for a given level of risk. 
B)  less risk than the market. 
C)  the greatest risk for a given level of return. 
D)  a return greater than the market. 
E)  A single asset cannot lie on the efficient frontier, only portfolios.

Question 7

Which of the following is true regarding the standard deviation for a portfolio?

Accepted Answer

A)  The portfolio's standard deviation must be less than the individual standard deviations. 
B)  The standard deviation of the portfolio falls continuously as more assets are added. 
C)  The standard deviation for a portfolio is a weighted average of individual standard deviations. 
D)  All of the above. 
E)  None of the above.

Question 8

The expected risk premium on a security is computed by

Accepted Answer

A)  Subtracting the security's expected return from the risk-free rate 
B)  Subtracting the expected market return from the security's expected return 
C)  Subtracting the risk-free rate from the security's expected return 
D)  Adding the security's expected return to the risk-free rate 
E)  Adding the security's expected return to the expected return on the market

Question 9

Stock X has an expected return of 10 percent and a standard deviation of 38 percent. Stock Y has an expected return of 13 percent and a standard deviation of 48 percent. The weight of Stock X in the minimum variance portfolio of the two assets is __________ than the weight of Stock Y.

Accepted Answer

A)  greater 
B)  less 
C)  the same 
D)  less only if the correlation is negative 
E)  greater only if the correlation is positive

Question 10

What assumptions are made about an investor when considering how they wish to allocate assets and construct their investment portfolio?

Accepted Answer

The answer of What assumptions are made about an investor...

Question 11

The Markowitz efficient frontier is defined as the

Accepted Answer

A)  Entire set of efficient portfolios given varying levels of risk 
B)  Highest level of return that can be obtained given any combination of tow individual assets 
C)  Single most efficient portfolio that can be generated from two individual assets 
D)  Total possible risk-return combination that can be generated from two individual assets 
E)  Minimum variance portfolio

Question 12

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

Accepted Answer

A)  10.67% 
B)  11.15% 
C)  10.10% 
D)  11.76% 
E)  10.86%

Question 13

The correlation between two stocks is -0.25. The standard deviation of Stock I is 48 percent, and the standard deviation of Stock J is 34 percent. What is the weight of Stock I in the minimum variance portfolio?

Accepted Answer

A)  0.486 
B)  0.366 
C)  0.410 
D)  0.532 
E)  0.461

Question 14

Stock J has a standard deviation of 67 percent and Stock K has a standard deviation of 51 percent. The correlation between the two stocks is -0.10. What is the standard deviation of a portfolio of the two assets with 35 percent invested in Stock J?

Accepted Answer

A)  46.23% 
B)  38.64% 
C)  41.07% 
D)  35.19% 
E)  43.82%

Question 15

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

Accepted Answer

A)  Stock returns are generally not affected by the state of the economy 
B)  The summation of the probabilities of the various economic states must equal to 10 
C)  The majority of stock returns increase as the state of the economy worsens 
D)  Both the risk and return on a security are affected by the likelihood of various economic states occurring 
E)  The probabilities of the various economic states affect the expected return on a stock, but not the level of risk associated with those returns

Question 16

While Stock A has a standard deviation of 37 percent, Stock B has a standard deviation of 46 percent. If the correlation between the stocks is 0.1528, what is the covariance?

Accepted Answer

A)  0.1702 
B)  0.0260 
C)  0.2875 
D)  0.1270 
E)  0.0565

Question 17

Which of the following is false about the expected risk premium of an asset?

Accepted Answer

A)  The expected risk premium is always positive. 
B)  The risk premium is the expected return of a risky asset minus the risk-free rate. 
C)  The expected risk premium is the reward for bearing risk. 
D)  The risk-free asset has no risk premium. 
E)  All of the above are true.

Question 18

You are computing the expected return on a portfolio of six stocks given three states of the economy. How will the expected return of the portfolio be computed given an economic state?

Accepted Answer

A)  Add up the returns on each stock and divide by 6 
B)  Sum up the returns on each stock and divide by (6 - 1) 
C)  Multiply the individual returns with the weights based on the market value of each of the stock position 
D)  Multiply the individual returns with the weights based on the relative prices of each stock position 
E)  Multiply the individual returns with the weights based on the number of shares of each stock owned

Question 19

You have a portfolio of two stocks. As you increase the weight of the lowest risk stock, the risk of your portfolio will:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  increase or decrease depending on the correlation. 
E)  decrease or remain the same.

Question 20

Suppose a portfolio has 55 percent of its assets invested in Stock S with a standard deviation of 40 percent and the remainder in Stock T with a standard deviation of 12 percent. If the correlation between the two stocks is 0.22, what is the standard deviation of the portfolio?

Accepted Answer

A)  21.05% 
B)  22.94% 
C)  23.78% 
D)  24.68% 
E)  25.56%

Exam 2: Diversification and Risky Asset Allocation