Question 1

The variances of stocks A and B are _____ and _____,respectively.

Accepted Answer

A)  1.5%; 1.9%
B)  2.2%; 1.2%
C)  3.2%; 2.0%
D)  1.5%; 1.1%
E)  none of the above

Question 2

The separation property refers to the conclusion that

Accepted Answer

A)  the determination of the best risky portfolio is objective and the choice of the best complete portfolio is subjective.
B)  the choice of the best complete portfolio is objective and the determination of the best risky portfolio is objective.
C)  the choice of inputs to be used to determine the efficient frontier is objective and the choice of the best CAL is subjective.
D)  the determination of the best CAL is objective and the choice of the inputs to be used to determine the efficient frontier is subjective.
E)  investors are separate beings and will therefore have different preferences regarding the risk-return tradeoff.

Question 3

Which of the following statements is (are) true 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 4

Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78,what is their covariance?

Accepted Answer

A)  0.038
B)  0.049
C)  0.047
D)  0.045
E)  0.054

Question 5

The standard deviation of a two-asset portfolio is a linear function of the assets' weights 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 less than one.

Question 6

The expected return of a portfolio of risky securities

Accepted Answer

A)  is a weighted average of the securities' returns.
B)  is the sum of the securities' returns.
C)  is the weighted sum of the securities' variances and covariances.
D)  A and C.
E)  none of the above.

Question 7

The risk that can be diversified away is

Accepted Answer

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

Question 8

For a two-stock portfolio,what would be the preferred correlation coefficient between the two stocks?

Accepted Answer

A)  +1.00.
B)  +0.50.
C)  0.00.
D)  -1.00.
E)  none of the above.

Question 9

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:

Accepted Answer

A)  lend some of her money at the risk-free rate and invest the remainder in the optimal risky portfolio.
B)  borrow some money at the risk-free rate and invest in the optimal risky portfolio.
C)  invest only in risky securities.
D)  such a portfolio cannot be formed.
E)  B and C

Question 10

The standard deviations of stocks A and B are _____ and _____,respectively.

Accepted Answer

A)  1.5%; 1.9%
B)  2.5%; 1.1%
C)  3.2%; 2.0%
D)  1.5%; 1.1%
E)  none of the above

Question 11

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 standard deviations of stocks C and D are _____ and _____,respectively.

Accepted Answer

A)  7.62%; 11.24%
B)  11.24%; 7.62%
C)  10.35%; 12.93%
D)  12.93%; 10.35%
E)  none of the above

Question 12

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 coefficient of correlation between C and D is

Accepted Answer

A)  0.67.
B)  0.50.
C)  -0.50.
D)  -0.67.
E)  none of the above.

Question 13

When borrowing and lending at a risk-free rate are allowed,which Capital Allocation Line (CAL) should the investor choose to combine with the efficient frontier?
I.The one with the highest reward-to-variability ratio.
II.The one that will maximize his utility.
III.The one with the steepest slope.
IV.The one with the lowest slope.

Accepted Answer

A)  I and III
B)  I and IV
C)  II and IV
D)  I only
E)  I,II,and III

Question 14

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)  0.45; 0.55
E)  0.76; 0.24

Question 15

The variance of a portfolio of risky securities

Accepted Answer

A)  is a weighted sum of the securities' variances.
B)  is the sum of the securities' variances.
C)  is the weighted sum of the securities' variances and covariances.
D)  is the sum of the securities' covariances.
E)  none of the above.

Question 16

If you invest 35% of your money in A and 65% in B,what would be your portfolio's expected rate of return and standard deviation?

Accepted Answer

A)  9.9%; 3%
B)  9.9%; 1.1%
C)  10%; 1.7%
D)  10%; 3%
E)  none of the above

Question 17

The expected rate of return and standard deviation of the global minimum variance portfolio,G,are __________ and __________,respectively.

Accepted Answer

A)  10.07%; 1.05%
B)  8.97%; 2.03%
C)  10.07%; 3.01%
D)  8.97%; 1.05%
E)  none of the above

Question 18

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?   Portfolio ‾ Expected Return‾ Standard Deviation ‾ A 10%12% B 5%7% C 15%20% D 12%25%\begin{array} { c c c } \underline{	ext { Portfolio } }&\underline{ 	ext { Expected Return} } &\underline{ 	ext { Standard Deviation }} \ 	ext { A } & 10 \% & 12 \% \	ext { B } & 5 \% & 7 \% \	ext { C } & 15 \% & 20 \% \	ext { D } & 12 \% & 25 \%\end{array} Portfolio ​ A  B  C  D ​ Expected Return​10%5%15%12%​ Standard Deviation ​12%7%20%25%​

Accepted Answer

A)  Only portfolio A cannot lie on the efficient frontier.
B)  Only portfolio B cannot lie on the efficient frontier.
C)  Only portfolio C cannot lie on the efficient frontier.
D)  Only portfolio D cannot lie on the efficient frontier.
E)  Cannot tell from the information given.

Question 19

Firm-specific 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, unique risk.
E)  none of the above.

Exam 7: Optimal Risky Portfolios

Correct Answer
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The risk that can be diversified away is

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The standard deviations of stocks A and B are _ and _,respectively.

Correct Answer
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The variances of stocks A and B are _ and _,respectively.

Correct Answer
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An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:

Correct Answer
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The expected return of a portfolio of risky securities

Correct Answer
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The variance of a portfolio of risky securities

Correct Answer
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The separation property refers to the conclusion that

Correct Answer
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Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78,what is their covariance?

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

Correct Answer
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For a two-stock portfolio,what would be the preferred correlation coefficient between the two stocks?

Correct Answer
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Firm-specific risk is also referred to as

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

Correct Answer
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The expected rate of return and standard deviation of the global minimum variance portfolio,G,are and ,respectively.

Correct Answer
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If you invest 35% of your money in A and 65% in B,what would be your portfolio's expected rate of return and standard deviation?

Correct Answer
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The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

Correct Answer
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Correct Answer
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Exam 7: Optimal Risky Portfolios

Correct AnswerverifiedShow Answer

The risk that can be diversified away is

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The standard deviations of stocks A and B are _____ and _____,respectively.

Correct AnswerverifiedShow Answer

The variances of stocks A and B are _____ and _____,respectively.

Correct AnswerverifiedShow Answer

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:

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The expected return of a portfolio of risky securities

Correct AnswerverifiedShow Answer

The variance of a portfolio of risky securities

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The separation property refers to the conclusion that

Correct AnswerverifiedShow Answer

Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78,what is their covariance?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

For a two-stock portfolio,what would be the preferred correlation coefficient between the two stocks?

Correct AnswerverifiedShow Answer

Firm-specific risk is also referred to as

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The expected rate of return and standard deviation of the global minimum variance portfolio,G,are __________ and __________,respectively.

Correct AnswerverifiedShow Answer

If you invest 35% of your money in A and 65% in B,what would be your portfolio's expected rate of return and standard deviation?

Correct AnswerverifiedShow Answer

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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The standard deviations of stocks A and B are _ and _,respectively.

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The variances of stocks A and B are _ and _,respectively.

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

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The expected rate of return and standard deviation of the global minimum variance portfolio,G,are and ,respectively.

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