Question 1

In a top-down analysis of portfolio construction

Accepted Answer

A)  decisions about which executives will manage the portfolio are made first,then capital allocation decisions are made. 
B)  decisions about asset allocation are made first,then specific securities are chosen. 
C)  decisions about specific securities are made first,then asset allocation decisions are made. 
D)  all securities transactions must be approved by upper-level management. 
E)  an investor's first decision would be about how much to hold in her favorite stock. 
A)  decisions about which executives will manage the portfolio are made first,then capital allocation decisions are made. 
B)  decisions about asset allocation are made first,then specific securities are chosen. 
C)  decisions about specific securities are made first,then asset allocation decisions are made. 
D)  all securities transactions must be approved by upper-level management. 
E)  an investor's first decision would be about how much to hold in her favorite stock. B

Question 2

Theoretically,the standard deviation of a portfolio can be reduced to what level? Explain.Realistically,is it possible to reduce the standard deviation to this level? Explain.

Accepted Answer

Theoretically,if one could find two securities with perfectly negatively correlated returns (correlation coefficient = -1),one could solve for the weights of these securities that would produce the minimum variance portfolio of these two securities.The standard deviation of the resulting portfolio would be equal to zero.However,in reality,securities with perfect negative correlations do not exist.

Question 3

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

Question 4

A statistic that measures how the returns of two risky assets move together is:

Accepted Answer

A)  variance. 
B)  standard deviation. 
C)  covariance. 
D)  correlation. 
E)  c and d. 
A)  variance. 
B)  standard deviation. 
C)  covariance. 
D)  correlation. 
E)  c and d.

Question 5

Market risk is also referred to as

Accepted Answer

A)  systematic risk,diversifiable risk. 
B)  systematic risk,nondiversifiable risk. 
C)  unique risk,nondiversifiable risk. 
D)  unique risk,diversifiable risk. 
E)  none of these. 
A)  systematic risk,diversifiable risk. 
B)  systematic risk,nondiversifiable risk. 
C)  unique risk,nondiversifiable risk. 
D)  unique risk,diversifiable risk. 
E)  none of these.

Question 6

In words,the covariance considers the probability of each scenario happening and the interaction between

Accepted Answer

A)  securities' returns relative to their variances. 
B)  securities' returns relative to their mean returns. 
C)  securities' returns relative to other securities' returns. 
D)  the level of return a security has in that scenario and the overall portfolio return. 
E)  the variance of the security's return in that scenario and the overall portfolio variance. 
A)  securities' returns relative to their variances. 
B)  securities' returns relative to their mean returns. 
C)  securities' returns relative to other securities' returns. 
D)  the level of return a security has in that scenario and the overall portfolio return. 
E)  the variance of the security's return in that scenario and the overall portfolio variance.

Question 7

Which statement about portfolio diversification is correct?

Accepted Answer

A)  Proper diversification can reduce or eliminate systematic risk. 
B)  The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased. 
C)  Because diversification reduces a portfolio's total risk,it necessarily reduces the portfolio's expected return. 
D)  Typically,as more securities are added to a portfolio,total risk would be expected to decrease at a decreasing rate. 
E)  None of these statements are correct. 
A)  Proper diversification can reduce or eliminate systematic risk. 
B)  The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased. 
C)  Because diversification reduces a portfolio's total risk,it necessarily reduces the portfolio's expected return. 
D)  Typically,as more securities are added to a portfolio,total risk would be expected to decrease at a decreasing rate. 
E)  None of these statements are correct.

Question 8

Other things equal,diversification is most effective when

Accepted Answer

A)  securities' returns are uncorrelated. 
B)  securities' returns are positively correlated. 
C)  securities' returns are high. 
D)  securities' returns are negatively correlated. 
E)  both securities' returns are positively correlated and securities' returns are high. 
A)  securities' returns are uncorrelated. 
B)  securities' returns are positively correlated. 
C)  securities' returns are high. 
D)  securities' returns are negatively correlated. 
E)  both securities' returns are positively correlated and securities' returns are high.

Question 9

Your client,Bo Regard,holds a complete portfolio that consists of a portfolio of risky assets (P)and T-Bills.The information below refers to these assets. $$\begin{array} { l c } 
\text { E( } \left. \mathrm { R } _ { \mathrm { p } } \right) & 12.00 \% \
\text { Standard Deviation of P } & 7.20 \% \
\text { T-Bill rate } & 3.60 \% \
& \
\text { Proportion of Complete Portfolio in P } & 80 \% \
\text { Proportion of Complete Portfolio in T-Bills } & 20 \% \
& \
\text { Composition of P: } \
\text { Stock A } &  40.00 \% \
\text { Stock B } &25.00 \% \
\text { Stock C } & 35.00 \% \
\text { Total } & 100.00 \% \
\hline \hline
\end{array}$$
What is the standard deviation of Bo's complete portfolio?

Accepted Answer

A)  7.20% 
B)  5.40% 
C)  6.92% 
D)  4.98% 
E)  5.76% 
A)  7.20% 
B)  5.40% 
C)  6.92% 
D)  4.98% 
E)  5.76%

Question 10

Market risk is also referred to as

Accepted Answer

A)  systematic risk,diversifiable risk. 
B)  systematic risk,nondiversifiable risk. 
C)  unique risk,nondiversifiable risk. 
D)  unique risk,diversifiable risk. 
E)  firm-specific risk. 
A)  systematic risk,diversifiable risk. 
B)  systematic risk,nondiversifiable risk. 
C)  unique risk,nondiversifiable risk. 
D)  unique risk,diversifiable risk. 
E)  firm-specific risk.

Question 11

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio,P,constructed with 2 risky securities,X and Y.The weights of X and Y in P are 0.60 and 0.40,respectively.X has an expected rate of return of 0.14 and variance of 0.01,and Y has an expected rate of return of 0.10 and a variance of 0.0081.What would be the dollar value of your positions in X,Y,and the T-bills,respectively,if you decide to hold a portfolio that has an expected outcome of $1,200?

Accepted Answer

A)  Cannot be determined 
B)  $54;$568;$378 
C)  $568;$54;$378 
D)  $378;$54;$568 
E)  $108;$514;$378 
A)  Cannot be determined 
B)  $54;$568;$378 
C)  $568;$54;$378 
D)  $378;$54;$568 
E)  $108;$514;$378

Question 12

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5&0.20 & 15 \% & 8 \%
\end{array}$$
The 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 these 
A)  1.5%;1.9% 
B)  2.5%;1.1% 
C)  3.2%;2.0% 
D)  1.5%;1.1% 
E)  none of these

Question 13

Your client,Bo Regard,holds a complete portfolio that consists of a portfolio of risky assets (P)and T-Bills.The information below refers to these assets. $$\begin{array} { l c } 
\text { E( } \left. \mathrm { R } _ { \mathrm { p } } \right) & 12.00 \% \
\text { Standard Deviation of P } & 7.20 \% \
\text { T-Bill rate } & 3.60 \% \
& \
\text { Proportion of Complete Portfolio in P } & 80 \% \
\text { Proportion of Complete Portfolio in T-Bills } & 20 \% \
& \
\text { Composition of P: } \
\text { Stock A } &  40.00 \% \
\text { Stock B } &25.00 \% \
\text { Stock C } & 35.00 \% \
\text { Total } & 100.00 \% \
\hline \hline
\end{array}$$
What are the proportions of Stocks A,B,and C,respectively in Bo's complete portfolio?

Accepted Answer

A)  40%,25%,35% 
B)  8%,5%,7% 
C)  32%,20%,28% 
D)  16%,10%,14% 
E)  20%,12.5%,17.5% 
A)  40%,25%,35% 
B)  8%,5%,7% 
C)  32%,20%,28% 
D)  16%,10%,14% 
E)  20%,12.5%,17.5%

Question 14

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio,P,constructed with 2 risky securities,X and Y.The weights of X and Y in P are 0.60 and 0.40,respectively.X has an expected rate of return of 0.14 and variance of 0.01,and Y has an expected rate of return of 0.10 and a variance of 0.0081.If you want to form a portfolio with an expected rate of return of 0.10,what percentages of your money must you invest in the T-bill,X,and Y,respectively if you keep X and Y in the same proportions to each other as in portfolio P?

Accepted Answer

A)  0.25;0.45;0.30 
B)  0.19;0.49;0.32 
C)  0.32;0.41;0.27 
D)  0.50;0.30;0.20 
E)  cannot be determined 
A)  0.25;0.45;0.30 
B)  0.19;0.49;0.32 
C)  0.32;0.41;0.27 
D)  0.50;0.30;0.20 
E)  cannot be determined

Question 15

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. 
E)  none of these. 
A)  greater than zero. 
B)  equal to zero. 
C)  equal to the sum of the securities' standard deviations. 
D)  equal to -1. 
E)  none of these.

Question 16

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the

Accepted Answer

A)  risk/reward tradeoff line 
B)  Capital Allocation Line 
C)  efficient frontier 
D)  portfolio opportunity set 
E)  Security Market Line 
A)  risk/reward tradeoff line 
B)  Capital Allocation Line 
C)  efficient frontier 
D)  portfolio opportunity set 
E)  Security Market Line

Question 17

Your client,Bo Regard,holds a complete portfolio that consists of a portfolio of risky assets (P)and T-Bills.The information below refers to these assets. $$\begin{array} { l c } 
\text { E( } \left. \mathrm { R } _ { \mathrm { p } } \right) & 12.00 \% \
\text { Standard Deviation of P } & 7.20 \% \
\text { T-Bill rate } & 3.60 \% \
& \
\text { Proportion of Complete Portfolio in P } & 80 \% \
\text { Proportion of Complete Portfolio in T-Bills } & 20 \% \
& \
\text { Composition of P: } \
\text { Stock A } &  40.00 \% \
\text { Stock B } &25.00 \% \
\text { Stock C } & 35.00 \% \
\text { Total } & 100.00 \% \
\hline \hline
\end{array}$$
What is the expected return on Bo's complete portfolio?

Accepted Answer

A)  10.32% 
B)  5.28% 
C)  9.62% 
D)  8.44% 
E)  7.58% 
A)  10.32% 
B)  5.28% 
C)  9.62% 
D)  8.44% 
E)  7.58%

Question 18

Other things equal,diversification is most effective when

Accepted Answer

A)  securities' returns are uncorrelated. 
B)  securities' returns are positively correlated. 
C)  securities' returns are high. 
D)  securities' returns are negatively correlated. 
E)  b and c. 
A)  securities' returns are uncorrelated. 
B)  securities' returns are positively correlated. 
C)  securities' returns are high. 
D)  securities' returns are negatively correlated. 
E)  b and c.

Question 19

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. 
E)  none of these. 
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. 
E)  none of these.

Question 20

The risk that can be diversified away in a portfolio is referred to as __________.
I.diversifiable risk
II.unique risk
III.systematic risk
IV.firm-specific risk

Accepted Answer

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

In a top-down analysis of portfolio construction

Theoretically,the standard deviation of a portfolio can be reduced to what level? Explain.Realistically,is it possible to reduce the standard deviation to this level? Explain.

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

A statistic that measures how the returns of two risky assets move together is:

Market risk is also referred to as

In words,the covariance considers the probability of each scenario happening and the interaction between

Which statement about portfolio diversification is correct?

Other things equal,diversification is most effective when

Market risk is also referred to as

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A 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\% The standard deviations of stocks A and B are _ and ,respectively.

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

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the

Other things equal,diversification is most effective when

The Capital Allocation Line provided by a risk-free security and N risky securities is

The risk that can be diversified away in a portfolio is referred to as __________. I.diversifiable risk II.unique risk III.systematic risk IV.firm-specific risk

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

Exam 6: Efficient Diversification

In a top-down analysis of portfolio construction

Theoretically,the standard deviation of a portfolio can be reduced to what level? Explain.Realistically,is it possible to reduce the standard deviation to this level? Explain.

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

A statistic that measures how the returns of two risky assets move together is:

Market risk is also referred to as

In words,the covariance considers the probability of each scenario happening and the interaction between

Which statement about portfolio diversification is correct?

Other things equal,diversification is most effective when

Market risk is also referred to as

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A 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\% The standard deviations of stocks A and B are _____ and ____,respectively.

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

The line representing all combinations of portfolio expected returns and standard deviations that can be constructed from two available assets is called the

Other things equal,diversification is most effective when

The Capital Allocation Line provided by a risk-free security and N risky securities is

The risk that can be diversified away in a portfolio is referred to as __________. I.diversifiable risk II.unique risk III.systematic risk IV.firm-specific risk

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A 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\% The standard deviations of stocks A and B are _ and ,respectively.