Question 1

Owning two securities instead of one will not improve a portfolio's risk-return tradeoff if the two securities are:

Accepted Answer

A)  perfectly positively correlated with each other. 
B)  perfectly independent of each other. 
C)  perfectly negatively correlated with each other. 
D)  of the same category, 
E) g. blue chips. 
A)  perfectly positively correlated with each other. 
B)  perfectly independent of each other. 
C)  perfectly negatively correlated with each other. 
D)  of the same category, 
E) g. blue chips.

Question 2

The bell-shaped curve, or normal distribution, is considered:

Accepted Answer

A)  discrete. 
B)  downward sloping. 
C)  linear. 
D)  continuous. 
A)  discrete. 
B)  downward sloping. 
C)  linear. 
D)  continuous.

Question 3

Given the following probability distribution, calculate the expected return of security XYZ.
$\begin{array}{cc}
\text { Security XYZ's }\
\underline {\text { Potential return }} & \underline {\text { Probability }} \
20 \% & 0.3 \
30 \% & 0.2 \
-40 \% & 0.1 \
50 \% & 0.1 \
10 \% & 0.3
\end{array}$
A)16 percent
B)22 percent
C)25 percent 
D)18 percent

Accepted Answer

A E(R) = @#LAT-DLM&R_i

Question 4

Portfolio risk is most often measured by professional investors using the:

Accepted Answer

A)  expected value. 
B)  portfolio's beta. 
C)  weighted average of the individual asset's risk. 
D)  portfolio's standard deviation. 
A)  expected value. 
B)  portfolio's beta. 
C)  weighted average of the individual asset's risk. 
D)  portfolio's standard deviation.

Question 5

Are the expected return and standard deviation of a portfolio both weighted averages of the individual security's expected returns and standard deviations? If not, what other factors are required?

Accepted Answer

The expected return is a weigh

Question 6

An investor combines two securities with perfect negative correlation and achieves a portfolio risk of zero. Will the portfolio also have an expected return of zero?

Accepted Answer

No, the portfolio will have an expected

Question 7

A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in:

Accepted Answer

A)  both the expected return and the risk of the portfolio. 
B)  only the expected return of the portfolio. 
C)  only the risk level of the portfolio. 
D)  neither the expected return nor the risk level of the portfolio. 
A)  both the expected return and the risk of the portfolio. 
B)  only the expected return of the portfolio. 
C)  only the risk level of the portfolio. 
D)  neither the expected return nor the risk level of the portfolio.

Question 8

Is it possible for a portfolio to have an expected return and risk that falls outside the range of expected returns and risks of the securities included in the portfolio?

Accepted Answer

A portfolio's expected return is confine

Question 9

Why was the Markowitz model impractical for commercial use when it was first introduced in 1952? What has changed since then?

Accepted Answer

The volume of calculations req

Question 10

Randomly adding securities to a portfolio will most likely:

Accepted Answer

A)  reduce its risk and increase its expected return. 
B)  reduce its risk and decrease its expected return. 
C)  increase its risk and increase its expected return. 
D)  reduce its risk and keep its expected return unchanged. 
A)  reduce its risk and increase its expected return. 
B)  reduce its risk and decrease its expected return. 
C)  increase its risk and increase its expected return. 
D)  reduce its risk and keep its expected return unchanged.

Question 11

Throwing a dart at the Wall Street Journal and selecting stocks on this basis would be considered random diversification.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is true regarding random diversification?

Accepted Answer

A)  Investment characteristics are considered important in random diversification. 
B)  Its net benefit eventually disappears as more securities are added. 
C)  If done correctly, it can eliminate all risk in a portfolio. 
D)  It eventually removes all company specific risk from a portfolio. 
A)  Investment characteristics are considered important in random diversification. 
B)  Its net benefit eventually disappears as more securities are added. 
C)  If done correctly, it can eliminate all risk in a portfolio. 
D)  It eventually removes all company specific risk from a portfolio.

Question 13

Each individual asset's weight in the portfolio is found by:

Accepted Answer

A)  dividing the asset's standard deviation by its expected value. 
B)  calculating the percentage of the asset's value to the total portfolio value. 
C)  calculating the return of the asset as a percent of total portfolio return. 
D)  dividing the asset's expected value by its standard deviation. 
A)  dividing the asset's standard deviation by its expected value. 
B)  calculating the percentage of the asset's value to the total portfolio value. 
C)  calculating the return of the asset as a percent of total portfolio return. 
D)  dividing the asset's expected value by its standard deviation.

Question 14

Security A and Security B have a correlation coefficient of 0. If Security A's return is expected to increase by 10 percent, Security B's:

Accepted Answer

A)  return should also increase by 10 percent. 
B)  return should decrease by 10 percent. 
C)  return should be zero. 
D)  expected return is impossible to determine from the above information. 
A)  return should also increase by 10 percent. 
B)  return should decrease by 10 percent. 
C)  return should be zero. 
D)  expected return is impossible to determine from the above information.

Question 15

Which of the following involves the interrelationship between security returns as well as the expected returns and variances of those returns?

Accepted Answer

A)  Random diversification 
B)  Correlating diversification 
C)  Friedman diversification 
D)  Markowitz diversification 
A)  Random diversification 
B)  Correlating diversification 
C)  Friedman diversification 
D)  Markowitz diversification

Question 16

Standard deviations for well-diversified portfolios are reasonably steady over time.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements about the correlation coefficient of the returns for two securities is not true?

Accepted Answer

A)  It is a statistical measure. 
B)  It measures the relationship between the two securities' returns. 
C)  It determines the cause of the relationship between the two securities' returns. 
D)  Its value falls between -1 and +1. 
A)  It is a statistical measure. 
B)  It measures the relationship between the two securities' returns. 
C)  It determines the cause of the relationship between the two securities' returns. 
D)  Its value falls between -1 and +1.

Question 18

With a discrete probability distribution:

Accepted Answer

A)  a probability is assigned to each possible outcome. 
B)  possible outcomes are constantly changing. 
C)  an infinite number of possible outcomes exist. 
D)  there is no variance. 
A)  a probability is assigned to each possible outcome. 
B)  possible outcomes are constantly changing. 
C)  an infinite number of possible outcomes exist. 
D)  there is no variance.

Question 19

Calculate the risk (standard deviation) of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5.
$\begin{array}{lcc} 
& \underline { \text { Variance } }&\underline {  \text { Weight (in the portfolio) }} \
 \text { Security A } & 10 & 0.3 \
\text { Security B } & 20 & 0.7
\end{array}$
A) 17.0 percent
B) 5.4 percent
C) 2.0 percent  
D) 3.7 percent

Accepted Answer

D @#LAT-DLM&_p = [w₁²

Question 20

Investments in commodities such as precious metals may provide additional
diversification opportunities for portfolios consisting of stocks and bonds.

Accepted Answer

A) True 
 B)False

Exam 7: Portfolio Theory

Owning two securities instead of one will not improve a portfolio's risk-return tradeoff if the two securities are:

The bell-shaped curve, or normal distribution, is considered:

Given the following probability distribution, calculate the expected return of security XYZ. Security XYZ's 20\% 0.3 30\% 0.2 -40\% 0.1 50\% 0.1 10\% 0.3 A)16 percent B)22 percent C)25 percent D)18 percent

Portfolio risk is most often measured by professional investors using the:

Are the expected return and standard deviation of a portfolio both weighted averages of the individual security's expected returns and standard deviations? If not, what other factors are required?

An investor combines two securities with perfect negative correlation and achieves a portfolio risk of zero. Will the portfolio also have an expected return of zero?

A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in:

Is it possible for a portfolio to have an expected return and risk that falls outside the range of expected returns and risks of the securities included in the portfolio?

Why was the Markowitz model impractical for commercial use when it was first introduced in 1952? What has changed since then?

Randomly adding securities to a portfolio will most likely:

Throwing a dart at the Wall Street Journal and selecting stocks on this basis would be considered random diversification.

Which of the following is true regarding random diversification?

Each individual asset's weight in the portfolio is found by:

Security A and Security B have a correlation coefficient of 0. If Security A's return is expected to increase by 10 percent, Security B's:

Which of the following involves the interrelationship between security returns as well as the expected returns and variances of those returns?

Standard deviations for well-diversified portfolios are reasonably steady over time.

Which of the following statements about the correlation coefficient of the returns for two securities is not true?

With a discrete probability distribution:

Calculate the risk (standard deviation) of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5. Security A 10 0.3 Security B 20 0.7 A) 17.0 percent B) 5.4 percent C) 2.0 percent D) 3.7 percent

Investments in commodities such as precious metals may provide additional diversification opportunities for portfolios consisting of stocks and bonds.

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Selection and Asset Allocation

Capital Market Theory and Asset Pricing Models

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

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