Question 1

Consider the following probability distribution for stocks A and B:   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% 
A) 13.2%; 9% 
B) 14%; 10% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2%

Question 2

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 3

The expected return of a portfolio of risky securities

Accepted Answer

A) is a weighted average of the securities' returns. 
B) is the sum of the securities' returns. 
C) is the weighted sum of the securities' variances and covariances. 
D) is a weighted average of the securities' returns and the weighted sum of the securities' variances and covariances. 
E) None of the options 
A) is a weighted average of the securities' returns. 
B) is the sum of the securities' returns. 
C) is the weighted sum of the securities' variances and covariances. 
D) is a weighted average of the securities' returns and the weighted sum of the securities' variances and covariances. 
E) None of the options

Question 4

Diversifiable risk is also referred to as

Accepted Answer

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

Question 5

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 6

Given an optimal risky portfolio with expected return of 20% and standard deviation of 24% and a risk free rate of 7%, what is the slope of the best feasible CAL

Accepted Answer

A) 0.64 
B) 0.14 
C) 0.62 
D) 0.33 
E) 0.54 
A) 0.64 
B) 0.14 
C) 0.62 
D) 0.33 
E) 0.54

Question 7

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. 
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.

Question 8

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) None of the options 
A) systematic risk, diversifiable risk. 
B) systematic risk, market risk. 
C) diversifiable risk, market risk. 
D) diversifiable risk, firm-specific risk. 
E) None of the options

Question 9

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 the options 
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 the options

Question 10

Consider two perfectly negatively correlated risky securities, K and L.K has an expected rate of return of 13% and a standard deviation of 19%.L has an expected rate of return of 10% and a standard deviation of 16%. The weights of K and L in the global minimum variance portfolio are _____ and _____, respectively.

Accepted Answer

A) 0.24; 0.76 
B) 0.50; 0.50 
C) 0.46; 0.54 
D) 0.45; 0.55 
E) 0.76; 0.24 
A) 0.24; 0.76 
B) 0.50; 0.50 
C) 0.46; 0.54 
D) 0.45; 0.55 
E) 0.76; 0.24

Question 11

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. 
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.

Question 12

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 13

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 the options. 
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 the options.

Question 14

Consider the following probability distribution for stocks A and B:   The expected rates of return of stocks A and B are _____ and _____, respectively.

Accepted Answer

A) 13.2%; 9% 
B) 13%; 8.4% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2% 
A) 13.2%; 9% 
B) 13%; 8.4% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2%

Question 15

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 that includes the portfolios with the lowest standard deviation. 
D) the set of portfolios that have zero standard deviation. 
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 that includes the portfolios with the lowest standard deviation. 
D) the set of portfolios that have zero standard deviation.

Question 16

Security X has expected return of 12% and standard deviation of 18%.Security Y has expected return of 15% and standard deviation of 26%.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) 0.033 
E) 0.054 
A) 0.038 
B) 0.070 
C) 0.018 
D) 0.033 
E) 0.054

Question 17

Which statement about portfolio diversification is correct

Accepted Answer

A) Proper diversification can 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 the statements is correct. 
A) Proper diversification can 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 the statements is correct.

Question 18

Consider two perfectly negatively correlated risky securities A and B.A has an expected rate of return of 10% and a standard deviation of 16%.B has an expected rate of return of 8% and a standard deviation of 12%. The weights of A and B in the global minimum variance portfolio are _____ and _____, respectively.

Accepted Answer

A) 0.24; 0.76 
B) 0.50; 0.50 
C) 0.57; 0.43 
D) 0.43; 0.57 
E) 0.76; 0.24 
A) 0.24; 0.76 
B) 0.50; 0.50 
C) 0.57; 0.43 
D) 0.43; 0.57 
E) 0.76; 0.24

Question 19

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

Question 20

Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 12% and a standard deviation of 17%.B has an expected rate of return of 9% and a standard deviation of 14%.The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Accepted Answer

A) 9.5% 
B) 10.4% 
C) 10.9% 
D) 9.9% 
A) 9.5% 
B) 10.4% 
C) 10.9% 
D) 9.9%

Exam 7: Optimal Risky Portfolios

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _____ and _____, respectively.

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 expected return of a portfolio of risky securities

Diversifiable risk is also referred to as

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

Given an optimal risky portfolio with expected return of 20% and standard deviation of 24% and a risk free rate of 7%, what is the slope of the best feasible CAL

The capital allocation line provided by a risk-free security and N risky securities is

Unique risk is also referred to as

The variance of a portfolio of risky securities

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

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

The individual investor's optimal portfolio is designated by:

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _____ and _____, respectively.

The efficient frontier of risky assets is

Security X has expected return of 12% and standard deviation of 18%.Security Y has expected return of 15% and standard deviation of 26%.If the two securities have a correlation coefficient of 0.7, what is their covariance

Which statement about portfolio diversification is correct

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _ and _, respectively.

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _ and _, respectively.