Question 1

Which of the following statement(s) is (are) false regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

Accepted Answer

A)  Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.
B)  More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.
C)  Investors choose the portfolio that maximizes their expected utility.
D)  A and B.
E)  A and C.

Question 2

State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.

Accepted Answer

The mean-variance criterion states that ...

Question 3

The unsystematic risk of a specific security

Accepted Answer

A)  is likely to be higher in an increasing market.
B)  results from factors unique to the firm.
C)  depends on market volatility.
D)  cannot be diversified away.
E)  none of the above.

Question 4

The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Accepted Answer

A)  9.5%
B)  11.4%
C)  10.9%
D)  9.9%
E)  none of the above

Question 5

Which of the following statements is (are) false regarding the variance of a portfolio of two risky securities?

Accepted Answer

A)  The higher the coefficient of correlation between securities,the greater the reduction in the portfolio variance.
B)  There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.
C)  The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.
D)  A and B.
E)  A and C.

Question 6

Discuss how the investor can use the separation theorem and utility theory to produce an efficient portfolio suitable for the investor's level of risk tolerance.

Accepted Answer

One can identify the optimum risky portf...

Question 7

Security X has expected return of 7% and standard deviation of 12%.Security Y has expected return of 11% and standard deviation of 20%.If the two securities have a correlation coefficient of -0.45,what is their covariance?

Accepted Answer

A)  0.0388
B)  -0.0108
C)  0.0184
D)  -0.0133
E)  -0.1512

Question 8

Efficient portfolios of N risky securities are portfolios that

Accepted Answer

A)  are formed with the securities that have the highest rates of return regardless of their standard deviations.
B)  have the highest rates of return for a given level of risk.
C)  are selected from those securities with the lowest standard deviations regardless of their returns.
D)  have the highest risk and rates of return and the highest standard deviations.
E)  have the lowest standard deviations and the lowest rates of return.

Question 9

Consider the following probability distribution for stocks A and B:   State‾ Probability ‾ Return on Stock A ‾ Return on Stock B ‾10.158%8%20.2013%7%30.1512%6%40.3014%9%50.2016%11%\begin{array}{cccc}\underline{	ext { State} } & \underline{	ext { Probability }} & \underline{	ext { Return on Stock A } }& \underline{	ext { Return on Stock B }} \1 & 0.15 & 8 \% & 8 \% \2 & 0.20 & 13 \% & 7 \% \3 & 0.15 & 12 \% & 6 \% \4 & 0.30 & 14 \% & 9 \% \5 & 0.20 & 16 \% & 11 \%\end{array} State​12345​ Probability ​0.150.200.150.300.20​ Return on Stock A ​8%13%12%14%16%​ Return on Stock B ​8%7%6%9%11%​

-The coefficient of correlation between A and B is

Accepted Answer

A)  0.474.
B)  0.612.
C)  0.590.
D)  1.206.
E)  none of the above.

Question 10

Consider the following probability distribution for stocks C and D:   State ‾ Probability ‾ Return on Stock C‾ Return on Stock D‾10.307%−9%20.5011%14%30.20−16%26%\begin{array}{cccc}\underline{	ext { State }} &\underline{ 	ext { Probability }} &\underline{ 	ext { Return on Stock C} } &\underline{ 	ext { Return on Stock D} } \1 & 0.30 & 7 \% & -9 \% \2 & 0.50 & 11 \% & 14 \% \3 & 0.20 & -16 \% & 26 \%\end{array} State ​123​ Probability ​0.300.500.20​ Return on Stock C​7%11%−16%​ Return on Stock D​−9%14%26%​

-The expected rates of return of stocks C and D are _____ and _____,respectively.

Accepted Answer

A)  4.4%; 9.5%
B)  9.5%; 4.4%
C)  6.3%; 8.7%
D)  8.7%; 6.2%
E)  none of the above

Question 11

Security X has expected return of 14% and standard deviation of 22%.Security Y has expected return of 16% and standard deviation of 28%.If the two securities have a correlation coefficient of 0.8,what is their covariance?

Accepted Answer

A)  0.038
B)  0.049
C)  0.018
D)  0.013
E)  0.054

Question 12

Portfolio theory as described by Markowitz is most concerned with:

Accepted Answer

A)  the elimination of systematic risk.
B)  the effect of diversification on portfolio risk.
C)  the identification of unsystematic risk.
D)  active portfolio management to enhance returns.
E)  none of the above.

Question 13

The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Accepted Answer

A)  8.5%
B)  9.0%
C)  8.9%
D)  9.9%
E)  none of the above

Question 14

A statistic that measures how the returns of two risky assets move together is:

Accepted Answer

A)  variance.
B)  standard deviation.
C)  covariance.
D)  correlation.
E)  C and D.

Question 15

Non-systematic risk is also referred to as

Accepted Answer

A)  market risk, diversifiable risk.
B)  firm-specific risk, market risk.
C)  diversifiable risk, market risk.
D)  diversifiable risk, unique risk.
E)  none of the above.

Question 16

A two-asset portfolio with a standard deviation of zero can be formed when

Accepted Answer

A)  the assets have a correlation coefficient less than zero.
B)  the assets have a correlation coefficient equal to zero.
C)  the assets have a correlation coefficient greater than zero.
D)  the assets have a correlation coefficient equal to one.
E)  the assets have a correlation coefficient equal to negative one.

Question 17

Unique risk is also referred to as

Accepted Answer

A)  systematic risk, diversifiable risk.
B)  systematic risk, market risk.
C)  diversifiable risk, market risk.
D)  diversifiable risk, firm-specific risk.
E)  none of the above.

Question 18

The coefficient of correlation between A and B is

Accepted Answer

A)  0.46.
B)  0.60.
C)  0.58.
D)  1.20.
E)  none of the above.

Question 19

The weights of A and B in the global minimum variance portfolio are _____ and _____,respectively.

Accepted Answer

A)  0.24; 0.76
B)  0.50; 0.50
C)  0.57; 0.43
D)  0.43; 0.57
E)  0.76; 0.24

Question 20

Given an optimal risky portfolio with expected return of 18% and standard deviation of 21% and a risk free rate of 5%,what is the slope of the best feasible CAL?

Accepted Answer

A)  0.64
B)  0.14
C)  0.62
D)  0.33
E)  0.36

Exam 7: Optimal Risky Portfolios

Non-systematic risk is also referred to as

Correct Answer
verified

Correct Answer
verified

Which of the following statement(s) is (are) false regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

Correct Answer
verified

Portfolio theory as described by Markowitz is most concerned with:

Correct Answer
verified

A statistic that measures how the returns of two risky assets move together is:

Correct Answer
verified

The coefficient of correlation between A and B is

Correct Answer
verified

The weights of A and B in the global minimum variance portfolio are _ and _,respectively.

Correct Answer
verified

The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Correct Answer
verified

The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Correct Answer
verified

Efficient portfolios of N risky securities are portfolios that

Correct Answer
verified

Discuss how the investor can use the separation theorem and utility theory to produce an efficient portfolio suitable for the investor's level of risk tolerance.

Correct Answer
verified
One can identify the optimum risky portf...
View Answer

Given an optimal risky portfolio with expected return of 18% and standard deviation of 21% and a risk free rate of 5%,what is the slope of the best feasible CAL?

Correct Answer
verified

State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.

Correct Answer
verified
The mean-variance criterion states that ...
View Answer

Unique risk is also referred to as

Correct Answer
verified

The unsystematic risk of a specific security

Correct Answer
verified

Which of the following statements is (are) false regarding the variance of a portfolio of two risky securities?

Correct Answer
verified

Correct Answer
verified

Security X has expected return of 7% and standard deviation of 12%.Security Y has expected return of 11% and standard deviation of 20%.If the two securities have a correlation coefficient of -0.45,what is their covariance?

Correct Answer
verified

Security X has expected return of 14% and standard deviation of 22%.Security Y has expected return of 16% and standard deviation of 28%.If the two securities have a correlation coefficient of 0.8,what is their covariance?

Correct Answer
verified

A two-asset portfolio with a standard deviation of zero can be formed when

Correct Answer
verified

Exam 7: Optimal Risky Portfolios

Non-systematic risk is also referred to as

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statement(s) is (are) false regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

Correct AnswerverifiedShow Answer

Portfolio theory as described by Markowitz is most concerned with:

Correct AnswerverifiedShow Answer

A statistic that measures how the returns of two risky assets move together is:

Correct AnswerverifiedShow Answer

The coefficient of correlation between A and B is

Correct AnswerverifiedShow Answer

The weights of A and B in the global minimum variance portfolio are _____ and _____,respectively.

Correct AnswerverifiedShow Answer

The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Correct AnswerverifiedShow Answer

The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Correct AnswerverifiedShow Answer

Efficient portfolios of N risky securities are portfolios that

Correct AnswerverifiedShow Answer

Discuss how the investor can use the separation theorem and utility theory to produce an efficient portfolio suitable for the investor's level of risk tolerance.

Correct AnswerverifiedOne can identify the optimum risky portf...View AnswerShow Answer

Given an optimal risky portfolio with expected return of 18% and standard deviation of 21% and a risk free rate of 5%,what is the slope of the best feasible CAL?

Correct AnswerverifiedShow Answer

State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.

Correct AnswerverifiedThe mean-variance criterion states that ...View AnswerShow Answer

Unique risk is also referred to as

Correct AnswerverifiedShow Answer

The unsystematic risk of a specific security

Correct AnswerverifiedShow Answer

Which of the following statements is (are) false regarding the variance of a portfolio of two risky securities?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Security X has expected return of 7% and standard deviation of 12%.Security Y has expected return of 11% and standard deviation of 20%.If the two securities have a correlation coefficient of -0.45,what is their covariance?

Correct AnswerverifiedShow Answer

Security X has expected return of 14% and standard deviation of 22%.Security Y has expected return of 16% and standard deviation of 28%.If the two securities have a correlation coefficient of 0.8,what is their covariance?

Correct AnswerverifiedShow Answer

A two-asset portfolio with a standard deviation of zero can be formed when

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The weights of A and B in the global minimum variance portfolio are _ and _,respectively.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
One can identify the optimum risky portf...
View Answer

Correct Answer
verified

Correct Answer
verified
The mean-variance criterion states that ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified