Question 1

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

Accepted Answer

A)  the assets have a correlation coefficient less than zero. 
B)  the assets have a correlation coefficient equal to zero. 
C)  the assets have a correlation coefficient greater than zero. 
D)  the assets have a correlation coefficient equal to one. 
E)  the assets have a correlation coefficient less than one. 
A)  the assets have a correlation coefficient less than zero. 
B)  the assets have a correlation coefficient equal to zero. 
C)  the assets have a correlation coefficient greater than zero. 
D)  the assets have a correlation coefficient equal to one. 
E)  the assets have a correlation coefficient less than one.

Question 2

When wealth is shifted from the risky portfolio to the risk-free asset,what happens to the relative proportions of the various risky assets within the risky portfolio?

Accepted Answer

A)  They all decrease. 
B)  Some increase and some decrease. 
C)  They all increase. 
D)  They are not changed. 
E)  The answer depends on the specific circumstances. 
A)  They all decrease. 
B)  Some increase and some decrease. 
C)  They all increase. 
D)  They are not changed. 
E)  The answer depends on the specific circumstances.

Question 3

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5&0.20 & 15 \% & 8 \%
\end{array}$$
If you invest 40% of your money in A and 60% in B,what would be your portfolio's expected rate of return and standard deviation?

Accepted Answer

A)  9.9%;3% 
B)  9.9%;1.1% 
C)  11%;1.1% 
D)  11%;3% 
E)  none of these 
A)  9.9%;3% 
B)  9.9%;1.1% 
C)  11%;1.1% 
D)  11%;3% 
E)  none of these

Question 4

The risk that can be diversified away is

Accepted Answer

A)  firm specific risk. 
B)  beta. 
C)  systematic risk. 
D)  market risk. 
E)  none of these. 
A)  firm specific risk. 
B)  beta. 
C)  systematic risk. 
D)  market risk. 
E)  none of these.

Question 5

Which of the following statements is(are)true regarding the variance of a portfolio of two risky securities?

Accepted Answer

A)  The higher the coefficient of correlation between securities,the greater the reduction in the portfolio variance. 
B)  There is a linear relationship between the securities' coefficient of correlation and the portfolio variance. 
C)  The degree to which the portfolio variance is reduced depends on the degree of correlation between securities. 
D)  a and b. 
E)  a and c. 
A)  The higher the coefficient of correlation between securities,the greater the reduction in the portfolio variance. 
B)  There is a linear relationship between the securities' coefficient of correlation and the portfolio variance. 
C)  The degree to which the portfolio variance is reduced depends on the degree of correlation between securities. 
D)  a and b. 
E)  a and c.

Question 6

As the number of securities in a portfolio is increased,what happens to the average portfolio standard deviation?

Accepted Answer

A)  It increases at an increasing rate. 
B)  It increases at a decreasing rate. 
C)  It decreases at an increasing rate. 
D)  It decreases at a decreasing rate. 
E)  It first decreases,then starts to increase as more securities are added. 
A)  It increases at an increasing rate. 
B)  It increases at a decreasing rate. 
C)  It decreases at an increasing rate. 
D)  It decreases at a decreasing rate. 
E)  It first decreases,then starts to increase as more securities are added.

Question 7

Beta is the measure of

Accepted Answer

A)  firm specific risk. 
B)  diversifiable risk. 
C)  market risk. 
D)  unique risk. 
E)  none of these. 
A)  firm specific risk. 
B)  diversifiable risk. 
C)  market risk. 
D)  unique risk. 
E)  none of these.

Question 8

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

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 tell 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 tell from the information given.

Question 9

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 coefficient of correlation between A and B is

Accepted Answer

A)  0.47. 
B)  0.60. 
C)  0.58 
D)  1.20. 
E)  none of these. 
A)  0.47. 
B)  0.60. 
C)  0.58 
D)  1.20. 
E)  none of these.

Question 10

Discuss how the investor can use the separation theorem and utility theory to produce an efficient portfolio suitable for the investor's level of risk tolerance.

Accepted Answer

One can identify the optimum risky portf

Question 11

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

Accepted Answer

A)  0.0 
B)  1.0 
C)  0.5 
D)  -1.0 
E)  negative 
A)  0.0 
B)  1.0 
C)  0.5 
D)  -1.0 
E)  negative

Question 12

Security X has expected return of 12% and standard deviation of 20%.Security Y has expected return of 15% and standard deviation of 27%.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)  0.013 
E)  0.054 
A)  0.038 
B)  0.070 
C)  0.018 
D)  0.013 
E)  0.054

Question 13

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

Accepted Answer

A)  The portfolio standard deviation will be greater than the weighted average of the individual security standard deviations. 
B)  The portfolio standard deviation will be less than the weighted average of the individual security standard deviations. 
C)  The portfolio standard deviation will be equal to the weighted average of the individual security standard deviations. 
D)  The portfolio standard deviation will always be equal to the securities' covariance. 
E)  None of these are true. 
A)  The portfolio standard deviation will be greater than the weighted average of the individual security standard deviations. 
B)  The portfolio standard deviation will be less than the weighted average of the individual security standard deviations. 
C)  The portfolio standard deviation will be equal to the weighted average of the individual security standard deviations. 
D)  The portfolio standard deviation will always be equal to the securities' covariance. 
E)  None of these are true.

Question 14

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

Question 16

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 17

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 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% 
E)  none of these 
A)  10.07%;1.05% 
B)  8.97%;2.03% 
C)  10.07%;3.01% 
D)  8.97%;1.05% 
E)  none of these

Question 18

Which of the following statement(s)is(are)true regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

Accepted Answer

A)  Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. 
B)  More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. 
C)  Investors choose the portfolio that maximizes their expected utility. 
D)  a and c. 
E)  b and c. 
A)  Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. 
B)  More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. 
C)  Investors choose the portfolio that maximizes their expected utility. 
D)  a and c. 
E)  b and c.

Question 19

The individual investor's optimal portfolio is designated by:

Accepted Answer

A)  The point of tangency with the indifference curve and the capital allocation line. 
B)  The point of highest reward to variability ratio in the opportunity set. 
C)  The point of tangency with the opportunity set and the capital allocation line. 
D)  The point of the highest reward to variability ratio in the indifference curve. 
E)  None of these. 
A)  The point of tangency with the indifference curve and the capital allocation line. 
B)  The point of highest reward to variability ratio in the opportunity set. 
C)  The point of tangency with the opportunity set and the capital allocation line. 
D)  The point of the highest reward to variability ratio in the indifference curve. 
E)  None of these.

Question 20

Draw a graph of a typical efficient frontier.Explain why the efficient frontier is shaped the way it is.

Accepted Answer

The efficient frontier has a c

Exam 6: Efficient Diversification

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

When wealth is shifted from the risky portfolio to the risk-free asset,what happens to the relative proportions of the various risky assets within the risky portfolio?

The risk that can be diversified away is

Which of the following statements is(are)true regarding the variance of a portfolio of two risky securities?

As the number of securities in a portfolio is increased,what happens to the average portfolio standard deviation?

Beta is the measure of

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

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 coefficient of correlation between A and B is

Discuss how the investor can use the separation theorem and utility theory to produce an efficient portfolio suitable for the investor's level of risk tolerance.

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

Security X has expected return of 12% and standard deviation of 20%.Security Y has expected return of 15% and standard deviation of 27%.If the two securities have a correlation coefficient of 0.7,what is their covariance?

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

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

Portfolio theory as described by Markowitz is most concerned with:

Efficient portfolios of N risky securities are portfolios that

Which of the following statement(s)is(are)true regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

The individual investor's optimal portfolio is designated by:

Draw a graph of a typical efficient frontier.Explain why the efficient frontier is shaped the way it is.

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