Question 1

You have plotted the data for two securities over time on the same graph, ie., the month return of each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have:

Accepted Answer

A)   no correlation at all.
B)   a weak negative correlation.
C)   a strong negative correlation.
D)   a strong positive correlation. D

Question 2

The covariance between the IS and DS returns is:

Accepted Answer

A)   .00187
B)   .00240
C)   .00028
D)   .000056 D

Question 3

The characteristic line is graphically depicted as:

Accepted Answer

A)   the plot of the relationship between beta and expected return
B)   the plot of the returns of the security against the beta
C)   the plot of the security against the market index returns
D)   the plot of the beta against the market index returns C

Question 4

The dominant portfolio with the lowest possible risk measures is:

Accepted Answer

A)   the efficient frontier.
B)   The minimum variance portfolio.
C)   The upper tail of the efficient set.
D)   The tangency portfolio.

Question 5

When a security is added to a portfolio the appropriate return and risk contributions are:

Accepted Answer

A)   the expected return of the asset and its standard deviation.
B)   the most probable return and the beta.
C)   the expected return and the beta.
D)   the most probable return and its standard deviation.

Question 6

A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security D. Security C has an expected return of 8% and a standard deviation of 6. Security B has an expected return of 10% and a standard deviation of 10. The securities have a coefficient of correlation of .6. Which of the following values is closest to portfolio return and variance?

Accepted Answer

A)   .095; .001675.
B)   .095; .0072.
C)   .100; .00849.
D)   .090; .0081.

Question 7

Diversification can effectively reduce risk. Once a portfolio is diversified the type of risk remaining is:

Accepted Answer

A)   individual security risk.
B)   riskless security risk.
C)   risk related to the market portfolio.
D)   total standard deviations.

Question 8

If the covariance of stock 1 with stock 2 is -.0065, then what is the covariance of stock 2 with stock 1?

Accepted Answer

A)   -.0065.
B)   less than -.0065.
C)   greater than +.0065.
D)   +.0065.

Question 9

Systematic risk is measured by:

Accepted Answer

A)   the mean.
B)   beta.
C)   the geometric average.
D)   the standard deviation.

Question 10

Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common is:

Accepted Answer

A)   3.2%.
B)   4.0%.
C)   7.2%.
D)   8.0%.
E)   9.0%.

Question 11

The separation principle states that an investor will:

Accepted Answer

A)   choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return.
B)   choose an efficient portfolio based on individual risk tolerance or utility.
C)   never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time.
D)   invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance.

Question 12

The opportunity set of portfolios is:

Accepted Answer

A)   all possible return combinations of those securities
B)   all possible risk combinations of those securities
C)   all possible risk-return combinations of those securities
D)   the best or highest risk-return combination
E)   the lowest risk-return combination

Question 13

Given the following information on three stocks:

-Now suppose you diversify into two securities. Given all choices, can any portfolio be eliminated? Assume equal weights.

Accepted Answer

The answer of Given the following information on three stocks:

-Now...

Question 14

When many assets are included in a portfolio or index the risk of the portfolio or index will be:

Accepted Answer

A)   greater than the risk of the securities because the correlations are greater than 1.
B)   equal to the risk of the securities because the correlations are equal to 1.
C)   less than the risk of the securities because the correlations are usually less than 1.
D)   unaffected by the risk of securities because their correlations are less than 1.

Question 15

When stocks with the same expected return are combined into a portfolio:

Accepted Answer

A)   the expected return of the portfolio is less than the average expected return of the stocks.
B)   the expected return of the portfolio is greater than the average expected return of the stocks.
C)   the expected return of the portfolio is equal to the average expected return of the stocks.
D)   there is no relationship between the expected return of the portfolio and the expected return of the stocks.

Question 16

Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:

Accepted Answer

A)   0.89.
B)   1.60.
C)   2.40.
D)   3.00.

Question 17

Draw and explain the relationship between the opportunity set for a two asset portfolio when the correlation is: [Choose from -1, -.5, 0, +.5, and +1]

Accepted Answer

The answer of Draw and explain the relationship between the...

Question 18

If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a variance that is:

Accepted Answer

A)   less than the weighted average of the two individual variances.
B)   greater than the weighted average of the two individual variances.
C)   equal to the weighted average of the two individual variances.
D)   less than or equal to average variance of the two weighted variances, depending on other information.

Question 19

If you have a portfolio of two risky stocks which turns out to have no diversification. The reason you have no diversification is:

Accepted Answer

A)   the returns are too small
B)   the returns move perfectly opposite of one another
C)   the returns are too large to offset
D)   the returns move perfectly with one another
E)   the returns are completely unrelated to one another

Question 20

A portfolio will usually contain:

Accepted Answer

A)   one riskless asset.
B)   one risky asset.
C)   two or more assets.
D)   no assets.

Exam 11: Risk and Return: the Capital Asset Pricing Model Capm