Question 1

An efficient set of portfolios is:

Accepted Answer

A)  the complete opportunity set. 
B)  the portion of the opportunity set below the minimum variance portfolio. 
C)  only the minimum variance portfolio. 
D)  the dominant portion of the opportunity set. 
E)  only the maximum return portfolio.

Question 2

Returns for the IC Company and for the S&P 500 Index over the previous 4-year period are given below:
 
What are the average returns on IC and on the S&P 500 index? If you had invested $1.00 in IC, how much would you have had after 4 years? What is the correlation between the returns on IC and the S&P?

Accepted Answer

The answer of Returns for the IC Company and for...

Question 3

A portfolio is entirely invested into Buzz's Bauxite Boring Equity, which is expected to return 16%, and Zum's Inc. bonds, which are expected to return 8%. Sixty percent of the funds are invested in Buzz's and the rest in Zum's. What is the expected return on the portfolio?

Accepted Answer

A)  9.6%. 
B)  12.8%. 
C)  24%. 
D)  6.4%.

Question 4

If IS and DS are combined in a portfolio with 50% invested in each, the expected return and risk would be:

Accepted Answer

A)  5.625%; 37.2% 
B)  4.5%; 5.48% 
C)  8.0%; 8.2% 
D)  5.0%; 0% 
E)  4.5%; 0%

Question 5

Given the following information on three stocks:  
σ = -.05333
bc
-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:...

Question 6

The total number of variance and covariance terms in portfolio is N2. How many of these would be (including non-unique) covariance's?

Accepted Answer

A)  N 
B)  N2 
B)  N2- N 
C)  N2- N/2

Question 7

A stock with a beta of zero would be expected to:

Accepted Answer

A)  have a rate of return equal to the risk-free rate. 
B)  have a rate of return equal to the market rate. 
C)  have a rate of return equal to zero. 
D)  have a rate of return equal to the one.

Question 8

Why are some risks diversifiable and some nondiversifiable? Give an example of each.

Accepted Answer

The answer of Why are some risks diversifiable and some...

Question 9

Draw the SML and plot asset C such that it has less risk than the market but plots above the SML, and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

Accepted Answer

The answer of Draw the SML and plot asset C...

Question 10

A portfolio exists containing stocks D, E, and F held in proportions 30%, 40%, and 30% respectively. The expected returns on the three stocks are given by 12%, 20%, and 28% respectively. Calculate the portfolio's expected return.

Accepted Answer

The answer of A portfolio exists containing stocks D, E,...

Question 11

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 12

Covariance measures the interrelationship between two securities in terms of:

Accepted Answer

A)  both expected return and direction of return movement. 
B)  both size and direction of return movement. 
C)  the standard deviation of returns. 
D)  both expected return and size of return movements. 
E)  the correlations of returns.

Question 13

A well-diversified portfolio has negligible:

Accepted Answer

A)  expected return. 
B)  systematic risk. 
C)  unsystematic risk. 
D)  variance.

Question 14

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 15

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 16

Given the following information on three stocks:  
σ = -.05333
bc
-Suppose you desire to invest in any one of the stocks listed above. Can any be recommended?

Accepted Answer

The answer of Given the following information on three stocks:...

Question 17

A portfolio contains four assets. Asset 1 has a beta of .8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio, the expected return on the portfolio and the market?

Accepted Answer

A)  1.19; 6.57; 6 
B)  1.19; 7.14; 6 
C)  1.19; 10.14; 9 
D)  1.25; 10.5; 6 
E)  1.25; 10.5; 9

Question 18

The expected return on GenLabs is:

Accepted Answer

A)  20.5 
B)  12.5 
C)  8.5 
D)  3.3

Question 19

Security One has a standard deviation of 6. Security Two has a standard deviation of 12. The securities have a coefficient of correlation of .5. Which of the following values is closest to portfolio variance?

Accepted Answer

A)  81. 
B)  90. 
C)  27. 
D)  6561.

Question 20

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.

Exam 10: Risk and Return: Lessons From Market History