Doç.Dr.Fatma Dilvin TAŞKIN – Yaşar Üniversitesi



Chapter 06Efficient Diversification?Multiple Choice Questions?1.Risk that can be eliminated through diversification is called ______ risk.??A.?uniqueB.?firm-specificC.?diversifiableD.?all of these options?2.The _______ decision should take precedence over the _____ decision.??A.?asset allocation; stock selectionB.?bond selection; mutual fund selectionC.?stock selection; asset allocationD.?stock selection; mutual fund selection?3.Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.??A.?they had to pay huge fines for obstruction of justiceB.?their 401k accounts were held outside the companyC.?their 401k accounts were not well diversifiedD.?none of these options?4.Based on the outcomes in the following table, choose which of the statements below is (are) correct???I. The covariance of security A and security B is zero.II. The correlation coefficient between securities A and C is negative.III. The correlation coefficient between securities B and C is positive.??A.?I onlyB.?I and II onlyC.?II and III onlyD.?I, II, and III?5.Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.??A.?asset AB.?asset BC.?no risky assetD.?The answer cannot be determined from the data given.?6.Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.??A.?up; rightB.?up; leftC.?down; rightD.?down; left?7.An investor's degree of risk aversion will determine his or her ______.??A.?optimal risky portfolioB.?risk-free rateC.?optimal mix of the risk-free asset and risky assetD.?capital allocation line?8.The ________ is equal to the square root of the systematic variance divided by the total variance.??A.?covarianceB.?correlation coefficientC.?standard deviationD.?reward-to-variability ratio?9.Which of the following statistics cannot be negative???A.?CovarianceB.?VarianceC.?E(r)D.?Correlation coefficient?10.Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio???A.?.40B.?.50C.?.75D.?.80?11.The correlation coefficient between two assets equals _________.??A.?their covariance divided by the product of their variancesB.?the product of their variances divided by their covarianceC.?the sum of their expected returns divided by their covarianceD.?their covariance divided by the product of their standard deviations?12.Diversification is most effective when security returns are _________.??A.?highB.?negatively correlatedC.?positively correlatedD.?uncorrelated?13.The expected rate of return of a portfolio of risky securities is _________.??A.?the sum of the securities' covariancesB.?the sum of the securities' variancesC.?the weighted sum of the securities' expected returnsD.?the weighted sum of the securities' variances?14.Beta is a measure of security responsiveness to _________.??A.?firm-specific riskB.?diversifiable riskC.?market riskD.?unique risk?15.The risk that can be diversified away is __________.??A.?betaB.?firm-specific riskC.?market riskD.?systematic risk?16.Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio???A.?2B.?6C.?8D.?20?17.Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.??A.?equal to the sum of the securities' standard deviationsB.?equal to -1C.?equal to 0D.?greater than 0?18.Market risk is also called __________ and _________.??A.?systematic risk; diversifiable riskB.?systematic risk; nondiversifiable riskC.?unique risk; nondiversifiable riskD.?unique risk; diversifiable risk?19.Firm-specific risk is also called __________ and __________.??A.?systematic risk; diversifiable riskB.?systematic risk; nondiversifiable riskC.?unique risk; nondiversifiable riskD.?unique risk; diversifiable risk?20.Which one of the following stock return statistics fluctuates the most over time???A.?Covariance of returnsB.?Variance of returnsC.?Average returnD.?Correlation coefficient?21.Harry Markowitz is best known for his Nobel Prize-winning work on _____________.??A.?strategies for active securities tradingB.?techniques used to identify efficient portfolios of risky assetsC.?techniques used to measure the systematic risk of securitiesD.?techniques used in valuing securities options?22.Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.??A.?the returns on the stock and bond portfolios tend to move inverselyB.?the returns on the stock and bond portfolios tend to vary independently of each otherC.?the returns on the stock and bond portfolios tend to move togetherD.?the covariance of the stock and bond portfolios will be positive?23.You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.??A.?more than 18% but less than 24%B.?equal to 18%C.?more than 12% but less than 18%D.?equal to 12%?24.On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.??A.?left and aboveB.?left and belowC.?right and aboveD.?right and below?25.The term complete portfolio refers to a portfolio consisting of _________________.??A.?the risk-free asset combined with at least one risky assetB.?the market portfolio combined with the minimum-variance portfolioC.?securities from domestic markets combined with securities from foreign marketsD.?common stocks combined with bonds?26.Rational risk-averse investors will always prefer portfolios _____________.??A.?located on the efficient frontier to those located on the capital market lineB.?located on the capital market line to those located on the efficient frontierC.?at or near the minimum-variance point on the efficient frontierD.?that are risk-free to all other asset choices?27.The optimal risky portfolio can be identified by finding:I. The minimum-variance point on the efficient frontierII. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontierIII. The tangency point of the capital market line and the efficient frontierIV. The line with the steepest slope that connects the risk-free rate to the efficient frontier??A.?I and II onlyB.?II and III onlyC.?III and IV onlyD.?I and IV only?28.The _________ reward-to-variability ratio is found on the ________ capital market line.??A.?lowest; steepestB.?highest; flattestC.?highest; steepestD.?lowest; flattest?29.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.??A.?.583B.?.225C.?.327D.?.128?30.The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.??A.?.12B.?.36C.?.60D.?.77?31.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.??A.?23%B.?19.76%C.?18.45%D.?17.67%?32.The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.??A.?-.0447B.?-.0020C.?.0020D.?.0447?33.Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________.??A.?10%B.?20%C.?40%D.?60%?34.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 proportion of the optimal risky portfolio that should be invested in stock A is _________.??A.?0%B.?40%C.?60%D.?100%?35.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 expected return on the optimal risky portfolio is _________.??A.?14%B.?15.6%C.?16.4%D.?18%?36.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 _________.??A.?0%B.?5%C.?7%D.?20%?37.An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.??A.?29%B.?44%C.?56%D.?71%?38.An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.)??A.?14%B.?16%C.?18%D.?19%?39.An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________.??A.?25.5%B.?22.3%C.?21.4%D.?20.7%?40.An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________.??A.?45%B.?67%C.?85%D.?92%?41.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 expected return on the minimum-variance portfolio is approximately _________.??A.?10%B.?13.6%C.?15%D.?19.41%?42.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 standard deviation of return on the minimum-variance portfolio is _________.??A.?0%B.?6%C.?12%D.?17%?43.A measure of the riskiness of an asset held in isolation is ____________.??A.?betaB.?standard deviationC.?covarianceD.?alpha?44.Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return???A.?7%B.?8.5%C.?8.8%D.?9.25%?45.The part of a stock's return that is systematic is a function of which of the following variables?I. Volatility in excess returns of the stock marketII. The sensitivity of the stock's returns to changes in the stock marketIII. The variance in the stock's returns that is unrelated to the overall stock market??A.?I onlyB.?I and II onlyC.?II and III onlyD.?I, II, and III?46.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.??A.?20% moreB.?slightly moreC.?20% lessD.?slightly less?47.Which risk can be partially or fully diversified away as additional securities are added to a portfolio?I. Total riskII. Systematic riskIII. Firm-specific risk??A.?I onlyB.?I and II onlyC.?I, II, and IIID.?I and III?48.According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.??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-offsB.?identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profileC.?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 aversionD.?choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate?49.You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________.??A.?all fall on the line of best fit; positive slopeB.?all fall on the line of best fit; negative slopeC.?are widely scattered around the line; positive slopeD.?are widely scattered around the line; negative slope?50.The term excess return refers to ______________.??A.?returns earned illegally by means of insider tradingB.?the difference between the rate of return earned and the risk-free rateC.?the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent riskD.?the portion of the return on a security that represents tax liability and therefore cannot be reinvested?51.You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________.??A.?covariance between ACE and the market has fallenB.?correlation coefficient between ACE and the market has fallenC.?correlation coefficient between ACE and the market has risenD.?unsystematic risk of ACE has risen?52.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???A.?1B.?.75C.?.60D.?.55?53.The values of beta coefficients of securities are __________.??A.?always positiveB.?always negativeC.?always between positive 1 and negative 1D.?usually positive but are not restricted in any particular way?54.A security's beta coefficient will be negative if ____________.??A.?its returns are negatively correlated with market-index returnsB.?its returns are positively correlated with market-index returnsC.?its stock price has historically been very stableD.?market demand for the firm's shares is very low?55.The market value weighted-average beta of firms included in the market index will always be _____________.??A.?0B.?between 0 and 1C.?1D.?none of these options (There is no particular rule concerning the average beta of firms included in the market index.)?56.Diversification can reduce or eliminate __________ risk.??A.?allB.?systematicC.?nonsystematicD.?only an insignificant?57.To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.??A.?1B.?.5C.?0D.?-1?58.Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.??A.?1B.?less than 1C.?between 0 and 1D.?less than or equal to 0?59.If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.??A.?stock's standard deviationB.?variance of the marketC.?stock's betaD.?covariance with the market index?60.Which of the following provides the best example of a systematic-risk event???A.?A strike by union workers hurts a firm's quarterly earnings.B.?Mad Cow disease in Montana hurts local ranchers and buyers of beef.C.?The Federal Reserve increases interest rates 50 basis points.D.?A senior executive at a firm embezzles $10 million and escapes to South America.?61.Which of the following statements is (are) true regarding time diversification?I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation.II. For a longer time horizon, uncertainty compounds over a greater number of years.III. Time diversification does not reduce risk.??A.?I onlyB.?II onlyC.?II and III onlyD.?I, II, and III?62.You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.??A.?1.8B.?2.48C.?3.12D.?5.49?63.??The beta of this stock is ____.??A.?.12B.?.35C.?1.32D.?4.05?64.??This stock has greater systematic risk than a stock with a beta of ___.??A.?.50B.?1.5C.?2D.?3?65.??The characteristic line for this stock is Rstock = ___ + ___ Rmarket.??A.?.35; .12B.?4.05; 1.32C.?15.44; .97D.?.26; 1.36?66.??_______________ percent of the variance is explained by this regression.??A.?12B.?35C.?4.05D.?80?67.??The stock is ______ riskier than the typical stock.??A.?32%B.?15.44%C.?12%D.?38%?68.Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.??A.?increase the systematic risk of the portfolioB.?increase the unsystematic risk of the portfolioC.?increase the return of the portfolioD.?decrease the variation in returns the investor faces in any one year?69.If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.??A.?calculate two covariances and one trivarianceB.?calculate only two covariancesC.?calculate three covariancesD.?average the variances of the individual stocks?70.Which of the following correlation coefficients will produce the least diversification benefit???A.?-.6B.?-.3C.?0D.?.8?71.Which of the following correlation coefficients will produce the most diversification benefits???A.?-.6B.?-.9C.?0D.?.4?72.What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500???A.?-1B.?0C.?1D.?.5?73.Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk???A.?Market riskB.?Nondiversifiable riskC.?Systematic riskD.?Unique risk?74.Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk???A.?Market riskB.?Unique riskC.?Unsystematic riskD.?None of these options (With a correlation of 1, no risk will be reduced.)?75.A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.??A.?firm-specific riskB.?systematic riskC.?unique riskD.?none of the options?76.As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that:I. The average risk per year may be smaller over longer investment horizons.II. The overall risk of your investment will compound over time.III. Your overall risk on the investment will fall.??A.?I onlyB.?I and II onlyC.?III onlyD.?I, II, and III?77.You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's:I. Expected returnII. Standard deviationIII. Correlation with your portfolio??A.?I onlyB.?I and II onlyC.?I and III onlyD.?I, II, and III?78.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???A.?σ2rp < (W12σ12 + W22σ22)B.?σ2rp = (W12σ12 + W22σ22)C.?σ2rp = (W12σ12 - W22σ22)D.?σ2rp > (W12σ12 + W22σ22)?79.What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.??A.?9.7%B.?12.2%C.?14%D.?15.6%?80.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.??A.?0%B.?10.8%C.?18%D.?24%?81.The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio???A.?0B.?.45C.?.74D.?1.35?82.A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment???A.?25%B.?50%C.?62%D.?73%?83.A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project???A.?0%B.?25%C.?50%D.?75%?84.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???A.?Stock AB.?Stock BC.?There is no difference between A or B.D.?The answer cannot be determined from the information given.?85.The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.??Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks???A.?Stock A is riskier.B.?Stock B is riskier.C.?Both stocks are equally risky.D.?The answer cannot be determined from the information given.?Chapter 06 Efficient Diversification Answer Key?Multiple Choice Questions?1.Risk that can be eliminated through diversification is called ______ risk.??A.?uniqueB.?firm-specificC.?diversifiableD.?all of these options?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?2.The _______ decision should take precedence over the _____ decision.??A.?asset allocation; stock selectionB.?bond selection; mutual fund selectionC.?stock selection; asset allocationD.?stock selection; mutual fund selection?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?3.Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.??A.?they had to pay huge fines for obstruction of justiceB.?their 401k accounts were held outside the companyC.?their 401k accounts were not well diversifiedD.?none of these options?AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?4.Based on the outcomes in the following table, choose which of the statements below is (are) correct???I. The covariance of security A and security B is zero.II. The correlation coefficient between securities A and C is negative.III. The correlation coefficient between securities B and C is positive.??A.?I onlyB.?I and II onlyC.?II and III onlyD.?I, II, and III?AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: 3 HardLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?5.Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.??A.?asset AB.?asset BC.?no risky assetD.?The answer cannot be determined from the data given.?AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?6.Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.??A.?up; rightB.?up; leftC.?down; rightD.?down; left?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: Efficient Diversification with Many Risky Assets?7.An investor's degree of risk aversion will determine his or her ______.??A.?optimal risky portfolioB.?risk-free rateC.?optimal mix of the risk-free asset and risky assetD.?capital allocation line?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-03 Construct efficient portfolios and use the Sharpe ratio to evaluate portfolio ic: The Optimal Risky Portfolio with a Risk-Free Asset?8.The ________ is equal to the square root of the systematic variance divided by the total variance.??A.?covarianceB.?correlation coefficientC.?standard deviationD.?reward-to-variability ratio?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?9.Which of the following statistics cannot be negative???A.?CovarianceB.?VarianceC.?E(r)D.?Correlation coefficient?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?10.Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio???A.?.40B.?.50C.?.75D.?.80?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-03 Construct efficient portfolios and use the Sharpe ratio to evaluate portfolio ic: The Optimal Risky Portfolio with a Risk-Free Asset?11.The correlation coefficient between two assets equals _________.??A.?their covariance divided by the product of their variancesB.?the product of their variances divided by their covarianceC.?the sum of their expected returns divided by their covarianceD.?their covariance divided by the product of their standard deviations?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?12.Diversification is most effective when security returns are _________.??A.?highB.?negatively correlatedC.?positively correlatedD.?uncorrelated?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?13.The expected rate of return of a portfolio of risky securities is _________.??A.?the sum of the securities' covariancesB.?the sum of the securities' variancesC.?the weighted sum of the securities' expected returnsD.?the weighted sum of the securities' variances?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?14.Beta is a measure of security responsiveness to _________.??A.?firm-specific riskB.?diversifiable riskC.?market riskD.?unique risk?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?15.The risk that can be diversified away is __________.??A.?betaB.?firm-specific riskC.?market riskD.?systematic risk?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?16.Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio???A.?2B.?6C.?8D.?20?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?17.Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.??A.?equal to the sum of the securities' standard deviationsB.?equal to -1C.?equal to 0D.?greater than 0?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?18.Market risk is also called __________ and _________.??A.?systematic risk; diversifiable riskB.?systematic risk; nondiversifiable riskC.?unique risk; nondiversifiable riskD.?unique risk; diversifiable risk?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?19.Firm-specific risk is also called __________ and __________.??A.?systematic risk; diversifiable riskB.?systematic risk; nondiversifiable riskC.?unique risk; nondiversifiable riskD.?unique risk; diversifiable risk?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?20.Which one of the following stock return statistics fluctuates the most over time???A.?Covariance of returnsB.?Variance of returnsC.?Average returnD.?Correlation coefficient?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?21.Harry Markowitz is best known for his Nobel Prize-winning work on _____________.??A.?strategies for active securities tradingB.?techniques used to identify efficient portfolios of risky assetsC.?techniques used to measure the systematic risk of securitiesD.?techniques used in valuing securities options?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: Efficient Diversification with Many Risky Assets?22.Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.??A.?the returns on the stock and bond portfolios tend to move inverselyB.?the returns on the stock and bond portfolios tend to vary independently of each otherC.?the returns on the stock and bond portfolios tend to move togetherD.?the covariance of the stock and bond portfolios will be positive?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?23.You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.??A.?more than 18% but less than 24%B.?equal to 18%C.?more than 12% but less than 18%D.?equal to 12%σ2p = .02592 = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12).55 = .02592; σ = 16.1%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?24.On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.??A.?left and aboveB.?left and belowC.?right and aboveD.?right and below?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?25.The term complete portfolio refers to a portfolio consisting of _________________.??A.?the risk-free asset combined with at least one risky assetB.?the market portfolio combined with the minimum-variance portfolioC.?securities from domestic markets combined with securities from foreign marketsD.?common stocks combined with bonds?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-03 Construct efficient portfolios and use the Sharpe ratio to evaluate portfolio ic: The Optimal Risky Portfolio with a Risk-Free Asset?26.Rational risk-averse investors will always prefer portfolios _____________.??A.?located on the efficient frontier to those located on the capital market lineB.?located on the capital market line to those located on the efficient frontierC.?at or near the minimum-variance point on the efficient frontierD.?that are risk-free to all other asset choices?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-03 Construct efficient portfolios and use the Sharpe ratio to evaluate portfolio ic: The Optimal Risky Portfolio with a Risk-Free Asset?27.The optimal risky portfolio can be identified by finding:I. The minimum-variance point on the efficient frontierII. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontierIII. The tangency point of the capital market line and the efficient frontierIV. The line with the steepest slope that connects the risk-free rate to the efficient frontier??A.?I and II onlyB.?II and III onlyC.?III and IV onlyD.?I and IV only?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-03 Construct efficient portfolios and use the Sharpe ratio to evaluate portfolio ic: The Optimal Risky Portfolio with a Risk-Free Asset?28.The _________ reward-to-variability ratio is found on the ________ capital market line.??A.?lowest; steepestB.?highest; flattestC.?highest; steepestD.?lowest; flattest?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-03 Construct efficient portfolios and use the Sharpe ratio to evaluate portfolio ic: The Optimal Risky Portfolio with a Risk-Free Asset?29.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.??A.?.583B.?.225C.?.327D.?.128.0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ρ; ρ = .583?AACSB: AnalyticBlooms: RememberDifficulty: 3 HardLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?30.The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.??A.?.12B.?.36C.?.60D.?.77Correlation = ?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?31.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.??A.?23%B.?19.76%C.?18.45%D.?17.67%σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45)σ2p = .039046σp = 19.76%?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?32.The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.??A.?-.0447B.?-.0020C.?.0020D.?.0447?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?33.Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________.??A.?10%B.?20%C.?40%D.?60%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?34.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 proportion of the optimal risky portfolio that should be invested in stock A is _________.??A.?0%B.?40%C.?60%D.?100%Since the numerator equals zero, WA = 0 without any further calculations.?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?35.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 expected return on the optimal risky portfolio is _________.??A.?14%B.?15.6%C.?16.4%D.?18%Wa = 0E(rp) = 1(.14) = .1400Since WA = 0 and WB = 1, the risky portfolio's expected return is the same as asset B's expected return.?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?36.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 _________.??A.?0%B.?5%C.?7%D.?20%Wa = 0Since WA = 0 and WB = 1, the risky portfolio's standard deviation is the same as asset B's standard deviation.?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?37.An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.??A.?29%B.?44%C.?56%D.?71%WB = 71%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?38.An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.)??A.?14%B.?16%C.?18%D.?19%WB = 71% and WA = 29%E[rp] = (.29)(.21) + (.71)(.14) = 16.03%?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?39.An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________.??A.?25.5%B.?22.3%C.?21.4%D.?20.7%WB = 71% and WA = 29%σ2rp = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4σ2rp = .045804σrp = 21.4%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?40.An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________.??A.?45%B.?67%C.?85%D.?92%WB = ; COVAB = ρABσAσB = (.35)(.24)(.14) = .01176WB = ?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?41.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 expected return on the minimum-variance portfolio is approximately _________.??A.?10%B.?13.6%C.?15%D.?19.41%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?42.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 standard deviation of return on the minimum-variance portfolio is _________.??A.?0%B.?6%C.?12%D.?17%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?43.A measure of the riskiness of an asset held in isolation is ____________.??A.?betaB.?standard deviationC.?covarianceD.?alpha?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?44.Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return???A.?7%B.?8.5%C.?8.8%D.?9.25%6% + (1.5%)(1.2) + 1% = 8.8%?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?45.The part of a stock's return that is systematic is a function of which of the following variables?I. Volatility in excess returns of the stock marketII. The sensitivity of the stock's returns to changes in the stock marketIII. The variance in the stock's returns that is unrelated to the overall stock market??A.?I onlyB.?I and II onlyC.?II and III onlyD.?I, II, and III?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?46.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.??A.?20% moreB.?slightly moreC.?20% lessD.?slightly less?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?47.Which risk can be partially or fully diversified away as additional securities are added to a portfolio?I. Total riskII. Systematic riskIII. Firm-specific risk??A.?I onlyB.?I and II onlyC.?I, II, and IIID.?I and III?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?48.According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.??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-offsB.?identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profileC.?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 aversionD.?choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?49.You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________.??A.?all fall on the line of best fit; positive slopeB.?all fall on the line of best fit; negative slopeC.?are widely scattered around the line; positive slopeD.?are widely scattered around the line; negative slope?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?50.The term excess return refers to ______________.??A.?returns earned illegally by means of insider tradingB.?the difference between the rate of return earned and the risk-free rateC.?the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent riskD.?the portion of the return on a security that represents tax liability and therefore cannot be reinvested?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-04 Calculate the composition of the optimal risky ic: The Optimal Risky Portfolio with a Risk-Free Asset?51.You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________.??A.?covariance between ACE and the market has fallenB.?correlation coefficient between ACE and the market has fallenC.?correlation coefficient between ACE and the market has risenD.?unsystematic risk of ACE has risen?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?52.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???A.?1B.?.75C.?.60D.?.55β = ?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?53.The values of beta coefficients of securities are __________.??A.?always positiveB.?always negativeC.?always between positive 1 and negative 1D.?usually positive but are not restricted in any particular way?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?54.A security's beta coefficient will be negative if ____________.??A.?its returns are negatively correlated with market-index returnsB.?its returns are positively correlated with market-index returnsC.?its stock price has historically been very stableD.?market demand for the firm's shares is very low?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?55.The market value weighted-average beta of firms included in the market index will always be _____________.??A.?0B.?between 0 and 1C.?1D.?none of these options (There is no particular rule concerning the average beta of firms included in the market index.)?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?56.Diversification can reduce or eliminate __________ risk.??A.?allB.?systematicC.?nonsystematicD.?only an insignificant?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?57.To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.??A.?1B.?.5C.?0D.?-1?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?58.Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.??A.?1B.?less than 1C.?between 0 and 1D.?less than or equal to 0?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?59.If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.??A.?stock's standard deviationB.?variance of the marketC.?stock's betaD.?covariance with the market index?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?60.Which of the following provides the best example of a systematic-risk event???A.?A strike by union workers hurts a firm's quarterly earnings.B.?Mad Cow disease in Montana hurts local ranchers and buyers of beef.C.?The Federal Reserve increases interest rates 50 basis points.D.?A senior executive at a firm embezzles $10 million and escapes to South America.?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?61.Which of the following statements is (are) true regarding time diversification?I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation.II. For a longer time horizon, uncertainty compounds over a greater number of years.III. Time diversification does not reduce risk.??A.?I onlyB.?II onlyC.?II and III onlyD.?I, II, and III?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: Risk of Long-Term Investments?62.You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.??A.?1.8B.?2.48C.?3.12D.?5.49The Sharpe ration grows at a rate of so the 3-year Sharpe ration would be 1.8 × = 3.12.?AACSB: AnalyticBlooms: ApplyDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: Risk of Long-Term Investments?63.??The beta of this stock is ____.??A.?.12B.?.35C.?1.32D.?4.05Beta equals slope coefficient = 1.32?AACSB: AnalyticBlooms: ApplyDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?64.??This stock has greater systematic risk than a stock with a beta of ___.??A.?.50B.?1.5C.?2D.?3.50 < 1.32?AACSB: AnalyticBlooms: ApplyDifficulty: 1 EasyLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?65.??The characteristic line for this stock is Rstock = ___ + ___ Rmarket.??A.?.35; .12B.?4.05; 1.32C.?15.44; .97D.?.26; 1.36Intercept equals 4.05, and slope equals 1.32.?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?66.??_______________ percent of the variance is explained by this regression.??A.?12B.?35C.?4.05D.?80R2 = 12 means 12% of the variance is explained by the regression.?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?67.??The stock is ______ riskier than the typical stock.??A.?32%B.?15.44%C.?12%D.?38%Beta of 1.32 means that this stock is 32% riskier than the market.?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?68.Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.??A.?increase the systematic risk of the portfolioB.?increase the unsystematic risk of the portfolioC.?increase the return of the portfolioD.?decrease the variation in returns the investor faces in any one year?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?69.If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.??A.?calculate two covariances and one trivarianceB.?calculate only two covariancesC.?calculate three covariancesD.?average the variances of the individual stocks?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?70.Which of the following correlation coefficients will produce the least diversification benefit???A.?-.6B.?-.3C.?0D.?.8?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?71.Which of the following correlation coefficients will produce the most diversification benefits???A.?-.6B.?-.9C.?0D.?.4?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?72.What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500???A.?-1B.?0C.?1D.?.5?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?73.Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk???A.?Market riskB.?Nondiversifiable riskC.?Systematic riskD.?Unique risk?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?74.Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk???A.?Market riskB.?Unique riskC.?Unsystematic riskD.?None of these options (With a correlation of 1, no risk will be reduced.)?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?75.A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.??A.?firm-specific riskB.?systematic riskC.?unique riskD.?none of the options?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 06-01 Show how covariance and correlation affect the power of diversification to reduce portfolio ic: Diversification and Portfolio Risk?76.As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that:I. The average risk per year may be smaller over longer investment horizons.II. The overall risk of your investment will compound over time.III. Your overall risk on the investment will fall.??A.?I onlyB.?I and II onlyC.?III onlyD.?I, II, and III?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: Risk of Long-Term Investments?77.You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's:I. Expected returnII. Standard deviationIII. Correlation with your portfolio??A.?I onlyB.?I and II onlyC.?I and III onlyD.?I, II, and III?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?78.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???A.?σ2rp < (W12σ12 + W22σ22)B.?σ2rp = (W12σ12 + W22σ22)C.?σ2rp = (W12σ12 - W22σ22)D.?σ2rp > (W12σ12 + W22σ22)?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?79.What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.??A.?9.7%B.?12.2%C.?14%D.?15.6%?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?80.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.??A.?0%B.?10.8%C.?18%D.?24%?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?81.The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio???A.?0B.?.45C.?.74D.?1.35Reward-to-variability ratio = (.089 - .035)/.12 = .45?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-03 Construct efficient portfolios and use the Sharpe ratio to evaluate portfolio ic: The Optimal Risky Portfolio with a Risk-Free Asset?82.A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment???A.?25%B.?50%C.?62%D.?73%E[rp] = (.60)(1) + (.40)(-.5) = .40σ2rp = (.60)(1 - .40)2 + (.40)(-.5 - .40)2 = .54σrp = .73?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?83.A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project???A.?0%B.?25%C.?50%D.?75%E[rp] = (.5)(100) + (.5)(-50) = 25%?AACSB: AnalyticBlooms: ApplyDifficulty: 1 EasyLearning Objective: 06-02 Calculate mean; variance; and covariance using either historical data or scenario ic: Asset Allocation with Two Risky Assets?84.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???A.?Stock AB.?Stock BC.?There is no difference between A or B.D.?The answer cannot be determined from the information given.?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market?85.The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.??Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks???A.?Stock A is riskier.B.?Stock B is riskier.C.?Both stocks are equally risky.D.?The answer cannot be determined from the information given.?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 06-05 Use index models to analyze the risk and return characteristics of securities and ic: A Single-Index Stock Market? ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download