Question 1

The standard deviations of stocks A and B are _____ and _____,respectively.

Accepted Answer

A) 1.5%; 1.9% 
B) 2.5%; 1.1% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1% 
E) none of the above 
A) 1.5%; 1.9% 
B) 2.5%; 1.1% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1% 
E) none of the above

Question 2

The standard deviation of a two-asset portfolio is a linear function of the assets' weights 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 less than 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 less than one.

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) A and C. 
E) none of the above. 
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) A and C. 
E) none of the above.

Question 4

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 5

The risk that can be diversified away is

Accepted Answer

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

Question 6

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 7

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 coefficient of correlation between C and D is

Accepted Answer

A) 0.67. 
B) 0.50. 
C) -0.50. 
D) -0.67. 
E) none of the above. 
A) 0.67. 
B) 0.50. 
C) -0.50. 
D) -0.67. 
E) none of the above.

Question 8

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 9

If you invest 35% of your money in A and 65% 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) 10%; 1.7% 
D) 10%; 3% 
E) none of the above 
A) 9.9%; 3% 
B) 9.9%; 1.1% 
C) 10%; 1.7% 
D) 10%; 3% 
E) none of the above

Question 10

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 above. 
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 above.

Question 11

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

Question 12

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

Question 13

For a two-stock portfolio,what would be the preferred correlation coefficient between the two stocks?

Accepted Answer

A) +1.00. 
B) +0.50. 
C) 0.00. 
D) -1.00. 
E) none of the above. 
A) +1.00. 
B) +0.50. 
C) 0.00. 
D) -1.00. 
E) none of the above.

Question 14

The variances of stocks A and B are _____ and _____,respectively.

Accepted Answer

A) 1.5%; 1.9% 
B) 2.2%; 1.2% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1% 
E) none of the above 
A) 1.5%; 1.9% 
B) 2.2%; 1.2% 
C) 3.2%; 2.0% 
D) 1.5%; 1.1% 
E) none of the above

Question 15

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 16

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? $$\begin{array} { c c c } 
\underline{\text { Portfolio } }&\underline{ \text { Expected Return} } &\underline{ \text { Standard Deviation }} \
 \text { A } & 10 \% & 12 \% \
\text { B } & 5 \% & 7 \% \
\text { C } & 15 \% & 20 \% \
\text { D } & 12 \% & 25 \%
\end{array}$$

Accepted Answer

A) Only portfolio A cannot lie on the efficient frontier. 
B) Only portfolio B cannot lie on the efficient frontier. 
C) Only portfolio C cannot lie on the efficient frontier. 
D) Only portfolio D cannot lie on the efficient frontier. 
E) Cannot tell from the information given. 
A) Only portfolio A cannot lie on the efficient frontier. 
B) Only portfolio B cannot lie on the efficient frontier. 
C) Only portfolio C cannot lie on the efficient frontier. 
D) Only portfolio D cannot lie on the efficient frontier. 
E) Cannot tell from the information given.

Question 17

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 standard deviations of stocks C and D are _____ and _____,respectively.

Accepted Answer

A) 7.62%; 11.24% 
B) 11.24%; 7.62% 
C) 10.35%; 12.93% 
D) 12.93%; 10.35% 
E) none of the above 
A) 7.62%; 11.24% 
B) 11.24%; 7.62% 
C) 10.35%; 12.93% 
D) 12.93%; 10.35% 
E) none of the above

Question 18

The expected rate of return and standard deviation of the global minimum variance portfolio,G,are __________ and __________,respectively.

Accepted Answer

A) 10.07%; 1.05% 
B) 8.97%; 2.03% 
C) 10.07%; 3.01% 
D) 8.97%; 1.05% 
E) none of the above 
A) 10.07%; 1.05% 
B) 8.97%; 2.03% 
C) 10.07%; 3.01% 
D) 8.97%; 1.05% 
E) none of the above

Question 19

Which of the following statements is (are)true 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.

Exam 7: Optimal Risky Portfolios

The standard deviations of stocks A and B are _____ and _____,respectively.

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

The expected return of a portfolio of risky securities

The separation property refers to the conclusion that

The risk that can be diversified away is

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

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 coefficient of correlation between C and D is

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

If you invest 35% of your money in A and 65% in B,what would be your portfolio's expected rate of return and standard deviation?

The variance of a portfolio of risky securities

Firm-specific risk is also referred to as

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?

For a two-stock portfolio,what would be the preferred correlation coefficient between the two stocks?

The variances of stocks A and B are _____ and _____,respectively.

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? A 10\% 12\% B 5\% 7\% C 15\% 20\% D 12\% 25\%

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 standard deviations of stocks C and D are _____ and _____,respectively.

The expected rate of return and standard deviation of the global minimum variance portfolio,G,are __________ and __________,respectively.

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

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 standard deviations of stocks A and B are _ and _,respectively.

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

The variances of stocks A and B 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 standard deviations of stocks C and D are _ and _,respectively.

The expected rate of return and standard deviation of the global minimum variance portfolio,G,are and ,respectively.