Question 1

The unsystematic risk of a specific security

Accepted Answer

A)  is likely to be higher in an increasing market. 
B)  results from factors unique to the firm. 
C)  depends on market volatility. 
D)  cannot be diversified away. 
E)  none of these. 
A)  is likely to be higher in an increasing market. 
B)  results from factors unique to the firm. 
C)  depends on market volatility. 
D)  cannot be diversified away. 
E)  none of these.

Question 2

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 values of your positions in X and Y,respectively,if you decide to hold 40% percent of your money in the risky portfolio and 60% in T-bills?

Accepted Answer

A)  $240;$360 
B)  $360;$240 
C)  $100;$240 
D)  $240;$160 
E)  cannot be determined 
A)  $240;$360 
B)  $360;$240 
C)  $100;$240 
D)  $240;$160 
E)  cannot be determined

Question 3

You are evaluating two investment alternatives.One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%.The other is a fund that is actively managed by your broker.This fund has an expected return of 15% and a standard deviation of 20%.The risk-free rate is currently 7%.Answer the questions below based on this information.
a.What is the slope of the Capital Market Line?
b.What is the slope of the Capital Allocation Line offered by your broker's fund?
c.Draw the CML and the CAL on one graph.
d.What is the maximum fee you broker could charge and still leave you as well off as if you had invested in the passive market fund? (Assume that the fee would be a percentage of the investment in the broker's fund,and would be deducted at the end of the year. )
e.How would it affect the graph if the broker were to charge the full amount of the fee?

Accepted Answer

a.The slope of the CML is (10 - 7)/16 =

Question 4

The variance of a portfolio of risky securities

Accepted Answer

A)  is a weighted sum of the securities' variances. 
B)  is the sum of the securities' variances. 
C)  is the weighted sum of the securities' variances and covariances. 
D)  is the sum of the securities' covariances. 
E)  none of these. 
A)  is a weighted sum of the securities' variances. 
B)  is the sum of the securities' variances. 
C)  is the weighted sum of the securities' variances and covariances. 
D)  is the sum of the securities' covariances. 
E)  none of these.

Question 5

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 rates of return of stocks A and B are _____ and ____,respectively.

Accepted Answer

A)  13.2%;9%. 
B)  14%;10% 
C)  13.2%;7.7% 
D)  7.7%;13.2% 
E)  none of these 
A)  13.2%;9%. 
B)  14%;10% 
C)  13.2%;7.7% 
D)  7.7%;13.2% 
E)  none of these

Question 6

Discuss the characteristics of indifference curves,and the theoretical value of these curves in the portfolio building process

Accepted Answer

Indifference curves represent the trade-

Question 7

State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.

Accepted Answer

The mean-variance criterion states that

Question 8

Given an optimal risky portfolio with expected return of 13% and standard deviation of 26% and a risk free rate of 5%,what is the slope of the best feasible CAL?

Accepted Answer

A)  0.60 
B)  0.14 
C)  0.08 
D)  0.36 
E)  0.31 
A)  0.60 
B)  0.14 
C)  0.08 
D)  0.36 
E)  0.31

Question 9

The efficient frontier of risky assets is

Accepted Answer

A)  the portion of the investment opportunity set that lies above the global minimum variance portfolio. 
B)  the portion of the investment opportunity set that represents the highest standard deviations. 
C)  the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation. 
D)  the set of portfolios that have zero standard deviation. 
E)  both a and b are true. 
A)  the portion of the investment opportunity set that lies above the global minimum variance portfolio. 
B)  the portion of the investment opportunity set that represents the highest standard deviations. 
C)  the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation. 
D)  the set of portfolios that have zero standard deviation. 
E)  both a and b are true.

Question 10

Given an optimal risky portfolio with expected return of 12% and standard deviation of 23% and a risk free rate of 3%,what is the slope of the best feasible CAL?

Accepted Answer

A)  0.64 
B)  0.39 
C)  0.08 
D)  0.35 
E)  0.36 
A)  0.64 
B)  0.39 
C)  0.08 
D)  0.35 
E)  0.36

Question 11

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 equation of Bo's Capital Allocation Line?

Accepted Answer

A)  E(r
C) = 7.2 + 3.6 * Standard Deviation of C 
B)  E(r
C) = 3.6 + 1.167 * Standard Deviation of C 
C)  E(r
C) = 3.6 + 12.0 * Standard Deviation of C 
D)  E(r
C) = 0.2 + 1.167 * Standard Deviation of C 
E)  E(r
C) = 3.6 + 0.857 * Standard Deviation of C 
A)  E(r
C) = 7.2 + 3.6 * Standard Deviation of C 
B)  E(r
C) = 3.6 + 1.167 * Standard Deviation of C 
C)  E(r
C) = 3.6 + 12.0 * Standard Deviation of C 
D)  E(r
C) = 0.2 + 1.167 * Standard Deviation of C 
E)  E(r
C) = 3.6 + 0.857 * Standard Deviation of C

Question 12

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:

Accepted Answer

A)  lend some of her money at the risk-free rate and invest the remainder in the optimal risky portfolio. 
B)  borrow some money at the risk-free rate and invest in the optimal risky portfolio. 
C)  invest only in risky securities. 
D)  such a portfolio cannot be formed. 
E)  b and c 
A)  lend some of her money at the risk-free rate and invest the remainder in the optimal risky portfolio. 
B)  borrow some money at the risk-free rate and invest in the optimal risky portfolio. 
C)  invest only in risky securities. 
D)  such a portfolio cannot be formed. 
E)  b and c

Question 13

Unique risk is also referred to as

Accepted Answer

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

Question 14

The optimal proportion of the risky asset in the complete portfolio is given by the equation y* = [E(rP)- rf]/(.01A*Variance of P).For each of the variables on the right side of the equation,discuss the impact the variable's effect on y* and why the nature of the relationship makes sense intuitively.Assume the investor is risk averse.

Accepted Answer

The optimal proportion in y is the one t

Question 15

The separation property refers to the conclusion that

Accepted Answer

A)  the determination of the best risky portfolio is objective and the choice of the best complete portfolio is subjective. 
B)  the choice of the best complete portfolio is objective and the determination of the best risky portfolio is objective. 
C)  the choice of inputs to be used to determine the efficient frontier is objective and the choice of the best CAL is subjective. 
D)  the determination of the best CAL is objective and the choice of the inputs to be used to determine the efficient frontier is subjective. 
E)  investors are separate beings and will therefore have different preferences regarding the risk-return tradeoff. 
A)  the determination of the best risky portfolio is objective and the choice of the best complete portfolio is subjective. 
B)  the choice of the best complete portfolio is objective and the determination of the best risky portfolio is objective. 
C)  the choice of inputs to be used to determine the efficient frontier is objective and the choice of the best CAL is subjective. 
D)  the determination of the best CAL is objective and the choice of the inputs to be used to determine the efficient frontier is subjective. 
E)  investors are separate beings and will therefore have different preferences regarding the risk-return tradeoff.

Question 16

When borrowing and lending at a risk-free rate are allowed,which Capital Allocation Line (CAL)should the investor choose to combine with the efficient frontier?
I.with the highest reward-to-variability ratio.
II.that will maximize his utility.
III.with the steepest slope.
IV.with the lowest slope.

Accepted Answer

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

Question 17

Given an optimal risky portfolio with expected return of 14% and standard deviation of 22% and a risk free rate of 6%,what is the slope of the best feasible CAL?

Accepted Answer

A)  0.64 
B)  0.14 
C)  0.08 
D)  0.33 
E)  0.36 
A)  0.64 
B)  0.14 
C)  0.08 
D)  0.33 
E)  0.36

Question 18

A two-asset portfolio with a standard deviation of zero can be formed 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 equal to negative 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 equal to negative one.

Question 19

The measure of risk in a Markowitz efficient frontier is:

Accepted Answer

A)  specific risk. 
B)  standard deviation of returns. 
C)  reinvestment risk. 
D)  beta. 
E)  none of these. 
A)  specific risk. 
B)  standard deviation of returns. 
C)  reinvestment risk. 
D)  beta. 
E)  none of these.

Question 20

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5&0.20 & 15 \% & 8 \%
\end{array}$$
Let G be the global minimum variance portfolio.The weights of A and B in G are __________ and _________,respectively.

Accepted Answer

A)  0.40;0.60 
B)  0.66;0.34 
C)  0.34;0.66 
D)  0.76;0.24 
E)  0.23;0.77 
A)  0.40;0.60 
B)  0.66;0.34 
C)  0.34;0.66 
D)  0.76;0.24 
E)  0.23;0.77

The unsystematic risk of a specific security

The variance of a portfolio of risky securities

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 expected rates of return of stocks A and B are _ and ,respectively.

Discuss the characteristics of indifference curves,and the theoretical value of these curves in the portfolio building process

State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.

Given an optimal risky portfolio with expected return of 13% and standard deviation of 26% and a risk free rate of 5%,what is the slope of the best feasible CAL?

The efficient frontier of risky assets is

Given an optimal risky portfolio with expected return of 12% and standard deviation of 23% and a risk free rate of 3%,what is the slope of the best feasible CAL?

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:

Unique risk is also referred to as

The separation property refers to the conclusion that

When borrowing and lending at a risk-free rate are allowed,which Capital Allocation Line (CAL)should the investor choose to combine with the efficient frontier? I.with the highest reward-to-variability ratio. II.that will maximize his utility. III.with the steepest slope. IV.with the lowest slope.

Given an optimal risky portfolio with expected return of 14% and standard deviation of 22% and a risk free rate of 6%,what is the slope of the best feasible CAL?

A two-asset portfolio with a standard deviation of zero can be formed when

The measure of risk in a Markowitz efficient frontier is:

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

The unsystematic risk of a specific security

The variance of a portfolio of risky securities

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 expected rates of return of stocks A and B are _____ and ____,respectively.

Discuss the characteristics of indifference curves,and the theoretical value of these curves in the portfolio building process

State Markowitz's mean-variance criterion.Give some numerical examples of how the criterion would be applied.

Given an optimal risky portfolio with expected return of 13% and standard deviation of 26% and a risk free rate of 5%,what is the slope of the best feasible CAL?

The efficient frontier of risky assets is

Given an optimal risky portfolio with expected return of 12% and standard deviation of 23% and a risk free rate of 3%,what is the slope of the best feasible CAL?

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:

Unique risk is also referred to as

The separation property refers to the conclusion that

When borrowing and lending at a risk-free rate are allowed,which Capital Allocation Line (CAL)should the investor choose to combine with the efficient frontier? I.with the highest reward-to-variability ratio. II.that will maximize his utility. III.with the steepest slope. IV.with the lowest slope.

Given an optimal risky portfolio with expected return of 14% and standard deviation of 22% and a risk free rate of 6%,what is the slope of the best feasible CAL?

A two-asset portfolio with a standard deviation of zero can be formed when

The measure of risk in a Markowitz efficient frontier is:

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 expected rates of return of stocks A and B are _ and ,respectively.