Question 1

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. 
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 2

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.20 & 12\% & 6\% \
4 & 0.30 & 14\% & 9\% \
5 & 0.20 & 15\% & 8 \%
\end{array}$
 Let G be the global minimum variance portfolio. The weights of A and B in G are __________ and __________, respectively.

Accepted Answer

A)  0.40; 0.60 
B)  0.66; 0.34 
C)  0.34; 0.66 
D)  0.77; 0.23 
E)  0.23; 0.77 
A)  0.40; 0.60 
B)  0.66; 0.34 
C)  0.34; 0.66 
D)  0.77; 0.23 
E)  0.23; 0.77

Question 3

Security X has expected return of 12% and standard deviation of 18%. Security Y has expected return of 15% and standard deviation of 26%. If the two securities have a correlation coefficient of 0.7, what is their covariance?

Accepted Answer

A)  0.038 
B)  0.070 
C)  0.018 
D)  0.033 
E)  0.054 
A)  0.038 
B)  0.070 
C)  0.018 
D)  0.033 
E)  0.054

Question 4

The capital allocation line provided by a risk-free security and N risky securities is

Accepted Answer

A)  the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. 
B)  the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. 
C)  the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. 
D)  the horizontal line drawn from the risk-free rate. 
A)  the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. 
B)  the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. 
C)  the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. 
D)  the horizontal line drawn from the risk-free rate.

Question 5

Which of the following is not a source of systematic risk?

Accepted Answer

A)  The business cycle 
B)  Interest rates 
C)  Personnel changes 
D)  The inflation rate 
E)  Exchange rates 
A)  The business cycle 
B)  Interest rates 
C)  Personnel changes 
D)  The inflation rate 
E)  Exchange rates

Question 6

Two securities have a covariance of 0.022. If their correlation coefficient is 0.52 and one has a standard deviation of 15%, what must be the standard deviation of the other security?

Accepted Answer

A)  12% 
B)  19% 
C)  22% 
D)  28% 
E)  32% 
A)  12% 
B)  19% 
C)  22% 
D)  28% 
E)  32%

Question 7

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Accepted Answer

A)  0.64 
B)  0.27 
C)  0.08 
D)  0.33 
E)  0.36 
A)  0.64 
B)  0.27 
C)  0.08 
D)  0.33 
E)  0.36

Question 8

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.20 & 12\%& 6\% \
4 & 0.30 & 14\%& 9\% \
5 & 0.20 & 15\% & 8 \%
\end{array}$
 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% 
A)  10.07%; 1.05% 
B)  8.97%; 2.03% 
C)  10.07%; 3.01% 
D)  8.97%; 1.05%

Question 9

Security X has expected return of 7% and standard deviation of 14%. Security Y has expected return of 11% and standard deviation of 22%. 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)  −0.0139 
E)  −0.1512 
A)  0.0388 
B)  −0.0108 
C)  0.0184 
D)  −0.0139 
E)  −0.1512

Question 10

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. 
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.

Question 11

Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$

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% 
A)  7.62%; 11.24% 
B)  11.24%; 7.62% 
C)  10.35%; 12.93% 
D)  12.93%; 10.35%

Question 12

Given an optimal risky portfolio with expected return of 16%, standard deviation of 20%, and a risk-free rate of 4%, what is the slope of the best feasible CAL?

Accepted Answer

A)  0.60 
B)  0.14 
C)  0.08 
D)  0.36 
E)  0.31 
A)  0.60 
B)  0.14 
C)  0.08 
D)  0.36 
E)  0.31

Question 13

Consider two perfectly negatively correlated risky securities, K and L. K has an expected rate of return of 12% and a standard deviation of 17%. L has an expected rate of return of 9% and a standard deviation of 11%. The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Accepted Answer

A)  9.5% 
B)  10.18% 
C)  10.9% 
D)  9.9% 
E)  None of the options are correct. 
A)  9.5% 
B)  10.18% 
C)  10.9% 
D)  9.9% 
E)  None of the options are correct.

Question 14

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? $\begin{array}{ccc}
\text { Portfolio } & \text { Expected Return } & \text { Standard Deviation } \
\text { W } & 9\% & 21\% \
\mathrm{X} & 5\%& 7\% \
\mathrm{Y} & 15\% & 36\% \
\mathrm{Z} & 12\% & 15 \%
\end{array}$

Accepted Answer

A)  Only portfolio W cannot lie on the efficient frontier. 
B)  Only portfolio X cannot lie on the efficient frontier. 
C)  Only portfolio Y cannot lie on the efficient frontier. 
D)  Only portfolio Z cannot lie on the efficient frontier. 
E)  Cannot be determined from the information given. 
A)  Only portfolio W cannot lie on the efficient frontier. 
B)  Only portfolio X cannot lie on the efficient frontier. 
C)  Only portfolio Y cannot lie on the efficient frontier. 
D)  Only portfolio Z cannot lie on the efficient frontier. 
E)  Cannot be determined from the information given.

Question 15

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. 
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.

Question 16

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 12% and a standard deviation of 17%. B has an expected rate of return of 9% and a standard deviation of 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 
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 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

Accepted Answer

A)  greater than zero. 
B)  equal to zero. 
C)  equal to the sum of the securities' standard deviations. 
D)  equal to −1. 
A)  greater than zero. 
B)  equal to zero. 
C)  equal to the sum of the securities' standard deviations. 
D)  equal to −1.

Question 18

Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL?

Accepted Answer

A)  0.64 
B)  0.14 
C)  0.62 
D)  0.33 
E)  0.54 
A)  0.64 
B)  0.14 
C)  0.62 
D)  0.33 
E)  0.54

Question 19

In a two-security minimum variance portfolio where the correlation between securities is greater than −1.0,

Accepted Answer

A)  the security with the higher standard deviation will be weighted more heavily. 
B)  the security with the higher standard deviation will be weighted less heavily. 
C)  the two securities will be equally weighted. 
D)  the risk will be zero. 
E)  the return will be zero. 
A)  the security with the higher standard deviation will be weighted more heavily. 
B)  the security with the higher standard deviation will be weighted less heavily. 
C)  the two securities will be equally weighted. 
D)  the risk will be zero. 
E)  the return will be zero.

Question 20

Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock C} & \text { Return on Stock D } \
1 & 0.30 & 7\% & -9\% \
2 & 0.50 & 11\% & 14\% \
3 & 0.20 & -16\% & 26\%
\end{array}$

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 options are correct. 
A)  0.67. 
B)  0.50. 
C)  ?0.50. 
D)  ?0.67. 
E)  None of the options are correct.

Exam 7: Efficient Diversification

Efficient portfolios of N risky securities are portfolios that

Security X has expected return of 12% and standard deviation of 18%. Security Y has expected return of 15% and standard deviation of 26%. If the two securities have a correlation coefficient of 0.7, what is their covariance?

The capital allocation line provided by a risk-free security and N risky securities is

Which of the following is not a source of systematic risk?

Two securities have a covariance of 0.022. If their correlation coefficient is 0.52 and one has a standard deviation of 15%, what must be the standard deviation of the other security?

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Security X has expected return of 7% and standard deviation of 14%. Security Y has expected return of 11% and standard deviation of 22%. If the two securities have a correlation coefficient of −0.45, what is their covariance?

The unsystematic risk of a specific security

Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock D 1 0.30 7\% -9\% 2 0.50 11\% 14\% 3 0.20 -16\% 26\% The standard deviations of stocks C and D are _____ and _____, respectively.

Given an optimal risky portfolio with expected return of 16%, standard deviation of 20%, and a risk-free rate of 4%, what is the slope of the best feasible CAL?

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Return Standard Deviation W 9\% 21\% 5\% 7\% 15\% 36\% 12\% 15\%

Portfolio theory as described by Markowitz is most concerned with

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

Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL?

In a two-security minimum variance portfolio where the correlation between securities is greater than −1.0,

Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock D 1 0.30 7\% -9\% 2 0.50 11\% 14\% 3 0.20 -16\% 26\% The coefficient of correlation between C and D is

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock D 1 0.30 7\% -9\% 2 0.50 11\% 14\% 3 0.20 -16\% 26\% The standard deviations of stocks C and D are _ and _, respectively.