Question 1

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. 
A) specific risk. 
B) standard deviation of returns. 
C) reinvestment risk. 
D) beta.

Question 2

Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky securities
I. The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance.
II. There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.
III. The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

Accepted Answer

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

Question 3

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. The one with the highest reward-to-variability ratio.
II. The one that will maximize his utility.
III. The one with the steepest slope.
IV. The one 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 4

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

Accepted Answer

A) 4.4%; 9.5% 
B) 9.5%; 4.4% 
C) 6.3%; 8.7% 
D) 8.7%; 6.2% 
E) None of the options 
A) 4.4%; 9.5% 
B) 9.5%; 4.4% 
C) 6.3%; 8.7% 
D) 8.7%; 6.2% 
E) None of the options

Question 5

Which of the following statement(s) is(are) false regarding the selection of a portfolio from those that lie on the capital allocation line
I. Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.
II. More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.
III. Investors choose the portfolio that maximizes their expected utility.

Accepted Answer

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

Question 6

Consider the following probability distribution for stocks A and B:   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 the options 
A) 9.9%; 3% 
B) 9.9%; 1.1% 
C) 11%; 1.1% 
D) 11%; 3% 
E) None of the options

Question 7

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 8

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. 
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.

Question 9

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. 
A) systematic risk, diversifiable risk. 
B) systematic risk, nondiversifiable risk. 
C) unique risk, nondiversifiable risk. 
D) unique risk, diversifiable risk.

Question 10

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 11

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

Question 12

Nonsystematic risk is also referred to as

Accepted Answer

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

Question 13

Security X has expected return of 14% and standard deviation of 22%.Security Y has expected return of 16% and standard deviation of 28%.If the two securities have a correlation coefficient of 0.8, what is their covariance

Accepted Answer

A) 0.038 
B) 0.049 
C) 0.018 
D) 0.013 
E) 0.054 
A) 0.038 
B) 0.049 
C) 0.018 
D) 0.013 
E) 0.054

Question 14

Given an optimal risky portfolio with expected return of 6% 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) 0.13 
E) 0.36 
A) 0.64 
B) 0.39 
C) 0.08 
D) 0.13 
E) 0.36

Question 15

Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on the capital allocation line
I. Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.
II. More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.
III. Investors choose the portfolio that maximizes their expected utility.

Accepted Answer

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

Question 16

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 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) 0.45; 0.55 
E) 0.76; 0.24 
A) 0.24; 0.76 
B) 0.50; 0.50 
C) 0.57; 0.43 
D) 0.45; 0.55 
E) 0.76; 0.24

Question 17

Consider the following probability distribution for stocks A and B:   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) 0.77; 0.23 
E) 0.23; 0.77 
A) 0.40; 0.60 
B) 0.66; 0.34 
C) 0.34; 0.66 
D) 0.77; 0.23 
E) 0.23; 0.77

Question 18

Nondiversifiable 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 19

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) any negative number. 
A) 0.0. 
B) 1.0. 
C) 0.5. 
D) -1.0. 
E) any negative number.

Question 20

Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78, what is their covariance

Accepted Answer

A) 0.038 
B) 0.049 
C) 0.047 
D) 0.045 
E) 0.054 
A) 0.038 
B) 0.049 
C) 0.047 
D) 0.045 
E) 0.054

Exam 7: Optimal Risky Portfolios

The measure of risk in a Markowitz efficient frontier is:

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

Consider the following probability distribution for stocks A and B: 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

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:

Market risk is also referred to as

Efficient portfolios of N risky securities are portfolios that

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

Nonsystematic risk is also referred to as

Security X has expected return of 14% and standard deviation of 22%.Security Y has expected return of 16% and standard deviation of 28%.If the two securities have a correlation coefficient of 0.8, what is their covariance

Given an optimal risky portfolio with expected return of 6% and standard deviation of 23% and a risk free rate of 3%, what is the slope of the best feasible CAL

Consider the following probability distribution for stocks A and B: Let G be the global minimum variance portfolio.The weights of A and B in G are __________ and __________, respectively.

Nondiversifiable risk is also referred to as

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

Security M has expected return of 17% and standard deviation of 32%.Security S has expected return of 13% and standard deviation of 19%.If the two securities have a correlation coefficient of 0.78, what is their covariance

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 C and D: The expected rates of return of stocks C and D are _ and _, respectively.

Consider the following probability distribution for stocks A and B: Let G be the global minimum variance portfolio.The weights of A and B in G are and , respectively.