Question 1

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 2

Which of the following is not a source of systematic risk?

Accepted Answer

A) The business cycle. 
B) Interest rates. 
C) Personnel changes. 
D) The inflation rate. 
E) Exchange rates. 
A) The business cycle. 
B) Interest rates. 
C) Personnel changes. 
D) The inflation rate. 
E) Exchange rates.

Question 3

Given an optimal risky portfolio with expected return of 16% and standard deviation of 20% and a risk free rate of 4%,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 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. 
E) none of the above. 
A) systematic risk, unique risk. 
B) systematic risk, market risk. 
C) unique risk, market risk. 
D) unique risk, firm-specific risk. 
E) none of the above.

Question 5

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

Question 6

Systematic risk is also referred to as

Accepted Answer

A) market risk, nondiversifiable risk. 
B) market risk, diversifiable risk. 
C) unique risk, nondiversifiable risk. 
D) unique risk, diversifiable risk. 
E) none of the above. 
A) market risk, nondiversifiable risk. 
B) market risk, diversifiable risk. 
C) unique risk, nondiversifiable risk. 
D) unique risk, diversifiable risk. 
E) none of the above.

Question 7

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

Question 8

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% 
E) none of the above 
A) 9.5% 
B) 10.4% 
C) 10.9% 
D) 9.9% 
E) none of the above

Question 9

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. 
E) none of the above. 
A) systematic risk, unique risk. 
B) systematic risk, market risk. 
C) unique risk, market risk. 
D) unique risk, firm-specific risk. 
E) none of the above.

Question 10

The risk that cannot be diversified away is

Accepted Answer

A) firm-specific risk. 
B) unique. 
C) non-systematic risk. 
D) market risk. 
E) none of the above. 
A) firm-specific risk. 
B) unique. 
C) non-systematic risk. 
D) market risk. 
E) none of the above.

Question 11

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

Question 12

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 13

Which of the following portfolio(s)is (are)on the efficient frontier?

Accepted Answer

A) The portfolio with 20 percent in A and 80 percent in B. 
B) The portfolio with 15 percent in A and 85 percent in B. 
C) The portfolio with 26 percent in A and 74 percent in B. 
D) The portfolio with 10 percent in A and 90 percent in B. 
E) A and B are both on the efficient frontier. 
A) The portfolio with 20 percent in A and 80 percent in B. 
B) The portfolio with 15 percent in A and 85 percent in B. 
C) The portfolio with 26 percent in A and 74 percent in B. 
D) The portfolio with 10 percent in A and 90 percent in B. 
E) A and B are both on the efficient frontier.

Question 14

Security X has expected return of 9% and standard deviation of 18%.Security Y has expected return of 12% and standard deviation of 21%.If the two securities have a correlation coefficient of -0.4,what is their covariance?

Accepted Answer

A) 0.0388 
B) 0.0706 
C) 0.0184 
D) -0.0133 
E) -0.0151 
A) 0.0388 
B) 0.0706 
C) 0.0184 
D) -0.0133 
E) -0.0151

Question 15

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 16

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 the above 
A) 13.2%; 9% 
B) 14%; 10% 
C) 13.2%; 7.7% 
D) 7.7%; 13.2% 
E) none of the above

Question 17

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

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 18

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 19

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 20

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

Exam 7: Optimal Risky Portfolios

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

Which of the following is not a source of systematic risk?

Given an optimal risky portfolio with expected return of 16% and standard deviation of 20% and a risk free rate of 4%,what is the slope of the best feasible CAL?

Diversifiable risk is also referred to as

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?

Systematic risk is also referred to as

Market risk is also referred to as

The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Nondiversifiable risk is also referred to as

The risk that cannot be diversified away is

The measure of risk in a Markowitz efficient frontier is:

The efficient frontier of risky assets is

Which of the following portfolio(s)is (are)on the efficient frontier?

Security X has expected return of 9% and standard deviation of 18%.Security Y has expected return of 12% and standard deviation of 21%.If the two securities have a correlation coefficient of -0.4,what is their covariance?

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

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

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

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?

Other things equal,diversification is most effective when

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

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