Question 1

If security A has a correlation of 0.5 with security B, it indicates that security A causes half of the movement in security B.

Accepted Answer

A) True 
 B)False  False

Question 2

* Use the following information to solve the next two problems *
 $$\begin{array} { | c | c | c | c | } 
\hline & & & \text { Correlation with } \
\hline \text { Asset } & \text { Expected Return } & \text { Std. Dev. w Return } & \text { Eneroy ETF } \
\hline \text { EneroyETF } & 6.8 \% & 21.2 \% & 1.0 \
\hline \text { Technology  ETF } & 12.4 \% & 37.9 \% & 0.34 \
\hline
\end{array}$$
-Find the standard deviation for a portfolio that is 70% invested in the energy ETF and 30% in the technology ETF.

Accepted Answer

$\sigma$_p² = [0.7² x 21.2² + 0.3² x 37.9² + 2 x 0.7 x 0.3 x 0.34 x 21.2 x 37.9] = 220.2256 + 129.2769 + 114.7369 = 464.2394 $\sigma$_p = 21.5462%

Question 3

In a portfolio containing 10 securities, the number of unique correlations is:

Accepted Answer

A)  10. 
B)  45. 
C)  90. 
D)  100. 
A)  10. 
B)  45. 
C)  90. 
D)  100. B

Question 4

The major problem with the Markowitz model is its:

Accepted Answer

A)  lack of accuracy. 
B)  predictability flaws. 
C)  complexity. 
D)  inability to handle large number of inputs. 
A)  lack of accuracy. 
B)  predictability flaws. 
C)  complexity. 
D)  inability to handle large number of inputs.

Question 5

Which of the following statements regarding portfolio risk and number of stocks is generally true?

Accepted Answer

A)  Adding more stocks increases risk. 
B)  Adding more stocks decreases risk but does not eliminate it. 
C)  Adding more stocks has no effect on risk. 
D)  Adding more stocks decreases only systematic risk. 
A)  Adding more stocks increases risk. 
B)  Adding more stocks decreases risk but does not eliminate it. 
C)  Adding more stocks has no effect on risk. 
D)  Adding more stocks decreases only systematic risk.

Question 6

A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.

Accepted Answer

A) True 
 B)False

Question 7

Given the following information, Calculate the expected return and risk (standard deviation) for General Fudge.
 $$\begin{array} { l c c c c } 
\text { Probabilities } & 0.20 & 0.15 & 0.50 & 0.15 \
\hline \text { Possible Outcomes } & 20 \% & 15 \% & 11 \% & - 5 \%
\end{array}$$

Accepted Answer

E(R_i) = 0.20(0.20) + 0.15(0.15) + 0.50(0.

Question 8

Why is it more difficult to put Markowitz diversification into effect than random diversification?

Accepted Answer

It requires more quantitative analysis a

Question 9

Portfolio risk can be reduced by reducing portfolio weights for assets with relatively high positive correlations.

Accepted Answer

A) True 
 B)False

Question 10

Probability distributions:

Accepted Answer

A)  are always discrete. 
B)  are always continuous. 
C)  can be either discrete or continuous. 
D)  are always symmetric. 
A)  are always discrete. 
B)  are always continuous. 
C)  can be either discrete or continuous. 
D)  are always symmetric.

Question 11

A portfolio consisting of two securities with perfect negative correlation in the proper proportions can be shown to have a standard deviation of zero. What makes this riskless portfolio impossible to achieve in the real world?

Accepted Answer

Perfect negative correlation is not achi

Question 12

Two stocks with perfect negative correlation will have a correlation coefficient of:

Accepted Answer

A)  +1.0 
B)  -2.0 
C)  0.0 
D)  -1.0 
A)  +1.0 
B)  -2.0 
C)  0.0 
D)  -1.0

Question 13

Which of the following would be considered a random variable?

Accepted Answer

A)  Expected value 
B)  Correlation coefficient between two assets 
C)  One-period rate of return for an asset 
D)  Beta 
A)  Expected value 
B)  Correlation coefficient between two assets 
C)  One-period rate of return for an asset 
D)  Beta

Question 14

According to the Law of Large Numbers, the larger the sample size, the more likely it is that the sample mean will be close to the population expected value.

Accepted Answer

A) True 
 B)False

Question 15

Is it wise for individuals to invest a portion of their investment portfolio in the common stock of the firm where they are employed? Explain why or why not.

Accepted Answer

It is unwise to invest in the stock of t

Question 16

Company specific risk is also known as:

Accepted Answer

A)  market risk. 
B)  systematic risk. 
C)  non-diversifiable risk. 
D)  diversifiable risk. 
A)  market risk. 
B)  systematic risk. 
C)  non-diversifiable risk. 
D)  diversifiable risk.

Question 17

The expected value is the:

Accepted Answer

A)  inverse of the standard deviation. 
B)  correlation between a security's risk and return. 
C)  weighted average of all possible outcomes. 
D)  same as the discrete probability distribution. 
A)  inverse of the standard deviation. 
B)  correlation between a security's risk and return. 
C)  weighted average of all possible outcomes. 
D)  same as the discrete probability distribution.

Question 18

Combining two securities with perfect negative correlation will always reduce risk to 0.

Accepted Answer

A) True 
 B)False

Question 19

Conventional wisdom has long held that diversification of a stock portfolio should be across industries. Does the correlation coefficient indirectly recommend the same thing?

Accepted Answer

Correlation coefficients between securit

Question 20

How risky is it to investment in a limited liability company (LLC) that searches for sunken treasure?

Accepted Answer

The answer to this question depends enti

Exam 7: Portfolio Theory

If security A has a correlation of 0.5 with security B, it indicates that security A causes half of the movement in security B.

In a portfolio containing 10 securities, the number of unique correlations is:

The major problem with the Markowitz model is its:

Which of the following statements regarding portfolio risk and number of stocks is generally true?

A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.

Given the following information, Calculate the expected return and risk (standard deviation) for General Fudge. Probabilities 0.20 0.15 0.50 0.15 Possible Outcomes 20\% 15\% 11\% -5\%

Why is it more difficult to put Markowitz diversification into effect than random diversification?

Portfolio risk can be reduced by reducing portfolio weights for assets with relatively high positive correlations.

Probability distributions:

A portfolio consisting of two securities with perfect negative correlation in the proper proportions can be shown to have a standard deviation of zero. What makes this riskless portfolio impossible to achieve in the real world?

Two stocks with perfect negative correlation will have a correlation coefficient of:

Which of the following would be considered a random variable?

According to the Law of Large Numbers, the larger the sample size, the more likely it is that the sample mean will be close to the population expected value.

Is it wise for individuals to invest a portion of their investment portfolio in the common stock of the firm where they are employed? Explain why or why not.

Company specific risk is also known as:

The expected value is the:

Combining two securities with perfect negative correlation will always reduce risk to 0.

Conventional wisdom has long held that diversification of a stock portfolio should be across industries. Does the correlation coefficient indirectly recommend the same thing?

How risky is it to investment in a limited liability company (LLC) that searches for sunken treasure?

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