Question 1

The coefficient of correlation between A and B is

Accepted Answer

A) 0.46. 
B) 0.60. 
C) 0.58. 
D) 1.20. 
E) none of the above. 
A) 0.46. 
B) 0.60. 
C) 0.58. 
D) 1.20. 
E) none of the above.

Question 2

Given an optimal risky portfolio with expected return of 18% and standard deviation of 21% and a risk free rate of 5%,what is the slope of the best feasible CAL?

Accepted Answer

A) 0.64 
B) 0.14 
C) 0.62 
D) 0.33 
E) 0.36 
A) 0.64 
B) 0.14 
C) 0.62 
D) 0.33 
E) 0.36

Question 3

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 4

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

Accepted Answer

A) 8.5% 
B) 9.0% 
C) 8.9% 
D) 9.9% 
E) none of the above 
A) 8.5% 
B) 9.0% 
C) 8.9% 
D) 9.9% 
E) none of the above

Question 5

Which of the following statements is (are)false 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

Consider the following probability distribution for stocks C and D: $\begin{array}{cccc}
\underline{\text { State }} &\underline{ \text { Probability }} &\underline{ \text { Return on Stock C} } &\underline{ \text { Return on Stock D} } \
1 & 0.30 & 7 \% & -9 \% \
2 & 0.50 & 11 \% & 14 \% \
3 & 0.20 & -16 \% & 26 \%
\end{array}$

-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 above 
A) 4.4%; 9.5% 
B) 9.5%; 4.4% 
C) 6.3%; 8.7% 
D) 8.7%; 6.2% 
E) none of the above

Question 7

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 8

Which of the following statement(s)is (are)false 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 B. 
E) A 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 B. 
E) A and C.

Question 9

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 10

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 11

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 the above. 
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 the above.

Question 12

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 the above. 
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 the above.

Question 13

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

Question 14

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 above. 
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 above.

Question 15

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

Accepted Answer

A) 9.5% 
B) 11.4% 
C) 10.9% 
D) 9.9% 
E) none of the above 
A) 9.5% 
B) 11.4% 
C) 10.9% 
D) 9.9% 
E) none of the above

Question 16

Security X has expected return of 7% and standard deviation of 12%.Security Y has expected return of 11% and standard deviation of 20%.If the two securities have a correlation coefficient of -0.45,what is their covariance?

Accepted Answer

A) 0.0388 
B) -0.0108 
C) 0.0184 
D) -0.0133 
E) -0.1512 
A) 0.0388 
B) -0.0108 
C) 0.0184 
D) -0.0133 
E) -0.1512

Question 17

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

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

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 20

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\underline{\text { State} } & \underline{\text { Probability }} & \underline{\text { Return on Stock A } }& \underline{\text { Return on Stock B }} \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.15 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 16 \% & 11 \%
\end{array}$

-The coefficient of correlation between A and B is

Accepted Answer

A) 0.474. 
B) 0.612. 
C) 0.590. 
D) 1.206. 
E) none of the above. 
A) 0.474. 
B) 0.612. 
C) 0.590. 
D) 1.206. 
E) none of the above.

Exam 7: Optimal Risky Portfolios

The coefficient of correlation between A and B is

Given an optimal risky portfolio with expected return of 18% and standard deviation of 21% and a risk free rate of 5%,what is the slope of the best feasible CAL?

The weights of A and B in the global minimum variance portfolio are _____ and _____,respectively.

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

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

Consider the following probability distribution for stocks C and D: 1 0.30 7\% -9\% 2 0.50 11\% 14\% 3 0.20 -16\% 26\% -The expected rates of return of stocks C and D 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.

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

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?

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

The unsystematic risk of a specific security

Portfolio theory as described by Markowitz is most concerned with:

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

Unique risk is also referred to as

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

Security X has expected return of 7% and standard deviation of 12%.Security Y has expected return of 11% and standard deviation of 20%.If the two securities have a correlation coefficient of -0.45,what is their covariance?

Non-systematic risk is also referred to as

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

Efficient portfolios of N risky securities are portfolios that

Consider the following probability distribution for stocks A and B: 1 0.15 8\% 8\% 2 0.20 13\% 7\% 3 0.15 12\% 6\% 4 0.30 14\% 9\% 5 0.20 16\% 11\% -The coefficient of correlation between A and B 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 weights of A and B in the global minimum variance portfolio are _ and _,respectively.

Consider the following probability distribution for stocks C and D: 1 0.30 7\% -9\% 2 0.50 11\% 14\% 3 0.20 -16\% 26\% -The expected rates of return of stocks C and D are _ and _,respectively.