Question 1

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

Accepted Answer

A)   increase the systematic risk of the portfolio
B)   increase the unsystematic risk of the portfolio
C)   increase the return of the portfolio
D)   decrease the variation in returns the investor faces in any one yearE) A) and B)
F) None of the above

Question 2

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

Accepted Answer

A)   20% more
B)   slightly more
C)   20% less
D)   slightly lessE) C) and D)
F) A) and D)

Question 3

The expected rate of return of a portfolio of risky securities is ________.

Accepted Answer

A)   the sum of the securities' covariance
B)   the sum of the securities' variance
C)   the weighted sum of the securities' expected returns
D)   the weighted sum of the securities' varianceE) All of the above
F) None of the above

Question 4

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and B is 20% and 10% respectively. The expected return on the minimum-variance portfolio is approximately ________.

Accepted Answer

A)   10%
B)   13.6%
C)   15%
D)   19.41%E) A) and B)
F) B) and C)

Question 5

The values of beta coefficients of securities are ________.

Accepted Answer

A)   always positive
B)   always negative
C)   always between positive 1 and negative 1
D)   usually positive but are not restricted in any particular wayE) A) and C)
F) B) and C)

Question 6

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

Accepted Answer

A)   1
B)   .75
C)   .60
D)   .55E) A) and C)
F) C) and D)

Question 7

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

Accepted Answer

A)   σ2rp 12σ12 + W22σ22) 
B)   σ2rp = (W12σ12 + W22σ22) 
C)   σ2rp = (W12σ12 - W22σ22) 
D)   σ2rp > (W12σ12 + W22σ22) E) A) and D)
F) A) and B)

Question 8

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of ________ and ________.

Accepted Answer

A)   identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs
B)   identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile
C)   identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion
D)   choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rateE) A) and B)
F) All of the above

Question 9

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

Accepted Answer

A)   1
B)   less than 1
C)   between 0 and 1
D)   less than or equal to 0E) A) and D)
F) B) and C)

Question 10

Beta is a measure of security responsiveness to ________.

Accepted Answer

A)   firm-specific risk
B)   diversifiable risk
C)   market risk
D)   unique riskE) B) and C)
F) A) and B)

Question 11

Which of the following statistics cannot be negative?

Accepted Answer

A)   covariance
B)   variance
C)   E(r) 
D)   correlation coefficientE) All of the above
F) C) and D)

Question 12

Diversification can reduce or eliminate ________ risk.

Accepted Answer

A)   all
B)   systematic
C)   nonsystematic
D)   only an insignificantE) None of the above
F) B) and C)

Question 13

The term excess return refers to ________.

Accepted Answer

A)   returns earned illegally by means of insider trading
B)   the difference between the rate of return earned and the risk-free rate
C)   the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk
D)   the portion of the return on a security that represents tax liability and therefore cannot be reinvestedE) B) and D)
F) None of the above

Question 14

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Accepted Answer

A)   0%
B)   10.8%
C)   18%
D)   24%E) A) and C)
F) All of the above

Question 15

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and B is 20% and 10% respectively. The standard deviation of return on the minimum-variance portfolio is ________.

Accepted Answer

A)   0%
B)   6%
C)   12%
D)   17%E) B) and C)
F) A) and D)

Question 16

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

Accepted Answer

A)   -1
B)   0
C)   1
D)   .5E) B) and C)
F) All of the above

Question 17

The ________ reward-to-variability ratio is found on the ________ capital market line.

Accepted Answer

A)   lowest; steepest
B)   highest; flattest
C)   highest; steepest
D)   lowest; flattestE) C) and D)
F) B) and C)

Question 18

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is ________.

Accepted Answer

A)   0%
B)   5%
C)   7%
D)   20%E) A) and D)
F) None of the above

Question 19

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.

Accepted Answer

A)   .12
B)   .36
C)   .60
D)   .77E) A) and D)
F) A) and C)

Question 20

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.  Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Accepted Answer

A)   Stock A
B)   Stock B
C)   There is no difference between A or B.
D)   The answer cannot be determined from the information given.E) None of the above
F) A) and D)

Exam 6: Efficient Diversification

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Correct Answer
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Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

Correct Answer
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What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Correct Answer
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Correct Answer
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A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

Correct Answer
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The values of beta coefficients of securities are ________.

Correct Answer
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According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of and .

Correct Answer
verified

The expected rate of return of a portfolio of risky securities is ________.

Correct Answer
verified

Diversification can reduce or eliminate ________ risk.

Correct Answer
verified

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

Correct Answer
verified

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.

Correct Answer
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Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

Correct Answer
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Correct Answer
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Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

Correct Answer
verified

Beta is a measure of security responsiveness to ________.

Correct Answer
verified

The term excess return refers to ________.

Correct Answer
verified

Which of the following statistics cannot be negative?

Correct Answer
verified

The reward-to-variability ratio is found on the capital market line.

Correct Answer
verified

Correct Answer
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What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

Correct Answer
verified

Exam 6: Efficient Diversification

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Correct AnswerverifiedShow Answer

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

Correct AnswerverifiedShow Answer

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

Correct AnswerverifiedShow Answer

The values of beta coefficients of securities are ________.

Correct AnswerverifiedShow Answer

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of ________ and ________.

Correct AnswerverifiedShow Answer

The expected rate of return of a portfolio of risky securities is ________.

Correct AnswerverifiedShow Answer

Diversification can reduce or eliminate ________ risk.

Correct AnswerverifiedShow Answer

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

Correct AnswerverifiedShow Answer

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.

Correct AnswerverifiedShow Answer

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

Correct AnswerverifiedShow Answer

Beta is a measure of security responsiveness to ________.

Correct AnswerverifiedShow Answer

The term excess return refers to ________.

Correct AnswerverifiedShow Answer

Which of the following statistics cannot be negative?

Correct AnswerverifiedShow Answer

The ________ reward-to-variability ratio is found on the ________ capital market line.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of and .

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The reward-to-variability ratio is found on the capital market line.

Correct Answer
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Correct Answer
verified

Correct Answer
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