Question 1

The division of an investor's portfolio dollars among various types of assets is referred to as:

Accepted Answer

A) the minimum variance portfolio. 
B) the efficient frontier. 
C) correlation. 
D) asset allocation. 
E) setting the investment opportunities. 
A) the minimum variance portfolio. 
B) the efficient frontier. 
C) correlation. 
D) asset allocation. 
E) setting the investment opportunities.

Question 2

Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?

Accepted Answer

A) minimum variance set 
B) financial frontier 
C) efficient portfolio 
D) allocated set 
E) investment opportunity set 
A) minimum variance set 
B) financial frontier 
C) efficient portfolio 
D) allocated set 
E) investment opportunity set

Question 3

The risk-free rate is 3.5%. What is the expected risk premium on this security given the following information?
$\begin{array}{lcc}
\text { State of the Economy }&\text { Probability}&\text { E(R) }\
\text { Boom } & .30 &15\% \
\text { Normal } & .55 &8\% \
\text { Recession } & .20 & -11 \%
\end{array}$

Accepted Answer

A) 2.09% 
B) 3.01% 
C) 3.20% 
D) 3.87% 
E) 4.15% 
A) 2.09% 
B) 3.01% 
C) 3.20% 
D) 3.87% 
E) 4.15%

Question 4

Which one of the following statements must be true?

Accepted Answer

A) All securities are projected to have higher rates of return when the economy booms versus when it is normal. 
B) Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment. 
C) The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession. 
D) The total of the probabilities of the economic states can vary between zero and 100%. 
E) Various economic states affect a portfolio's expected return but not the expected level of risk. 
A) All securities are projected to have higher rates of return when the economy booms versus when it is normal. 
B) Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment. 
C) The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession. 
D) The total of the probabilities of the economic states can vary between zero and 100%. 
E) Various economic states affect a portfolio's expected return but not the expected level of risk.

Question 5

What is the standard deviation of the returns on this stock?
$\begin{array}{lcc}
\text { State of the Economy}&\text { Probability}&\text { E(R)}\
\text { Boom } & .22& 24\% \
\text { Normal }&.66&12\%\
\text { Recession } & .12& -60\%
\end{array}$

Accepted Answer

A) 223.94% 
B) 24.08% 
C) 24.17% 
D) 24.85% 
E) 26.90% 
A) 223.94% 
B) 24.08% 
C) 24.17% 
D) 24.85% 
E) 26.90%

Question 6

What is the expected return on this stock given the following information?
$\begin{array}{lcc}
\text { State of the Economy}&\text { Probability}&\text { E(R)}\
\text { Boom } & .4 & 12\% \
\text { Recession } & .6 & -12\%
\end{array}$

Accepted Answer

A) 5.70% 
B) 5.20% 
C) 4.80% 
D) 3.70% 
E) 2.40% 
A) 5.70% 
B) 5.20% 
C) 4.80% 
D) 3.70% 
E) 2.40%

Question 7

Non-diversifiable risk:

Accepted Answer

A) can be cut almost in half by investing in 10 stocks provided each stock is in a different industry. 
B) can almost be eliminated by investing in 35 diverse securities. 
C) remains constant regardless of the number of securities held in a portfolio. 
D) has little, if any, impact on the actual realized returns for a diversified portfolio. 
E) should be ignored by investors. 
A) can be cut almost in half by investing in 10 stocks provided each stock is in a different industry. 
B) can almost be eliminated by investing in 35 diverse securities. 
C) remains constant regardless of the number of securities held in a portfolio. 
D) has little, if any, impact on the actual realized returns for a diversified portfolio. 
E) should be ignored by investors.

Question 8

You have a portfolio which is comprised of 55% of Stock A and 45% of Stock B. What is the expected return on this portfolio?
$\begin{array}{lrrr}
\text { State of the Economy } & \text { Probability } & \text { E(R)}_{A}& \text {  E(R)}_{B}\
\text { Weight } & & 55 \% & 45 \% \
\text { Boom } & .15 & 19 \% & 12\% \
\text { Normal } & .65 & 11 \% & 7 \% \
\text { Recession } & .20 & -16 \% & 1 \%
\end{array}$

Accepted Answer

A) 5.45% 
B) 6.69% 
C) 7.14% 
D) 7.60% 
E) 8.22% 
A) 5.45% 
B) 6.69% 
C) 7.14% 
D) 7.60% 
E) 8.22%

Question 9

Which of the following are affected by the probability of a state of the economy occurring?
I. expected return of an individual security
II. expected return of a portfolio
III. standard deviation of an individual security
IV. standard deviation of a portfolio

Accepted Answer

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

Question 10

Assume the returns on Stock X were positive in January, February, April, July, and November. During the other months, the returns on Stock X were negative. The returns on Stock Y were positive in January, April, May, July, August, and October, and negative the remaining months. Which one of the following correlation coefficients best describes the relationship between Stock X and Stock Y?

Accepted Answer

A) −1.0 
B) −.5 
C) 0 
D) .5 
E) 1.0 
A) −1.0 
B) −.5 
C) 0 
D) .5 
E) 1.0

Question 11

The risk-free rate is 4.20%. What is the expected risk premium on this stock given the following information?
$\begin{array}{lrr}
\text { State of the Economy } & \text { Probability of } & \text { Rate of Return if } \
& \text { State of Economy } & \text { state occurs }\
\text { Boom } & .28& 23\% \
\text { Normal } & .72 &11 \%
\end{array}$

Accepted Answer

A) 5.85% 
B) 6.59% 
C) 8.22% 
D) 10.16% 
E) 11.21% 
A) 5.85% 
B) 6.59% 
C) 8.22% 
D) 10.16% 
E) 11.21%

Question 12

What is the correlation coefficient of two assets that are uncorrelated?

Accepted Answer

A) −100 
B) −1 
C) 0 
D) 1 
E) 100 
A) −100 
B) −1 
C) 0 
D) 1 
E) 100

Question 13

Which one of the following statements is correct concerning asset allocation?

Accepted Answer

A) Because there is an ideal mix, all investors should use the same asset allocation for their portfolios. 
B) The minimum variance portfolio will have a 50/50 asset allocation between stocks and bonds. 
C) Asset allocation affects the expected return but not the risk level of a portfolio. 
D) There is an ideal asset allocation between stocks and bonds given a specified level of risk. 
E) Asset allocation should play a minor role in portfolio construction. 
A) Because there is an ideal mix, all investors should use the same asset allocation for their portfolios. 
B) The minimum variance portfolio will have a 50/50 asset allocation between stocks and bonds. 
C) Asset allocation affects the expected return but not the risk level of a portfolio. 
D) There is an ideal asset allocation between stocks and bonds given a specified level of risk. 
E) Asset allocation should play a minor role in portfolio construction.

The division of an investor's portfolio dollars among various types of assets is referred to as:

Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?

The risk-free rate is 3.5%. What is the expected risk premium on this security given the following information? State of the Economy Probability E(R) Boom .30 15\% Normal .55 8\% Recession .20 -11\%

Which one of the following statements must be true?

What is the standard deviation of the returns on this stock? State of the Economy Probability E(R) Boom .22 24\% Normal .66 12\% Recession .12 -60\%

What is the expected return on this stock given the following information? State of the Economy Probability E(R) Boom .4 12\% Recession .6 -12\%

Non-diversifiable risk:

You have a portfolio which is comprised of 55% of Stock A and 45% of Stock B. What is the expected return on this portfolio? State of the Economy Probability Weight 55\% 45\% Boom .15 19\% 12\% Normal .65 11\% 7\% Recession .20 -16\% 1\%

Which of the following are affected by the probability of a state of the economy occurring? I. expected return of an individual security II. expected return of a portfolio III. standard deviation of an individual security IV. standard deviation of a portfolio

The risk-free rate is 4.20%. What is the expected risk premium on this stock given the following information? State of the Economy Probability of Rate of Return if State of Economy state occurs Boom .28 23\% Normal .72 11\%

What is the correlation coefficient of two assets that are uncorrelated?

Which one of the following statements is correct concerning asset allocation?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Exam 11: Diversification and Risky Asset Allocation

The division of an investor's portfolio dollars among various types of assets is referred to as:

Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?

The risk-free rate is 3.5%. What is the expected risk premium on this security given the following information? State of the Economy Probability E(R) Boom .30 15\% Normal .55 8\% Recession .20 -11\%

Which one of the following statements must be true?

What is the standard deviation of the returns on this stock? State of the Economy Probability E(R) Boom .22 24\% Normal .66 12\% Recession .12 -60\%

What is the expected return on this stock given the following information? State of the Economy Probability E(R) Boom .4 12\% Recession .6 -12\%

Non-diversifiable risk:

You have a portfolio which is comprised of 55% of Stock A and 45% of Stock B. What is the expected return on this portfolio? State of the Economy Probability Weight 55\% 45\% Boom .15 19\% 12\% Normal .65 11\% 7\% Recession .20 -16\% 1\%

Which of the following are affected by the probability of a state of the economy occurring? I. expected return of an individual security II. expected return of a portfolio III. standard deviation of an individual security IV. standard deviation of a portfolio

The risk-free rate is 4.20%. What is the expected risk premium on this stock given the following information? State of the Economy Probability of Rate of Return if State of Economy state occurs Boom .28 23\% Normal .72 11\%

What is the correlation coefficient of two assets that are uncorrelated?

Which one of the following statements is correct concerning asset allocation?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters