Question 1

Firm-specific risk is also referred to as

Accepted Answer

A)  systematic risk or diversifiable risk. 
B)  systematic risk or market risk. 
C)  diversifiable risk or market risk. 
D)  diversifiable risk or unique risk. 
A)  systematic risk or diversifiable risk. 
B)  systematic risk or market risk. 
C)  diversifiable risk or market risk. 
D)  diversifiable risk or unique risk.

Question 2

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A } & \text {  Return on Stock B } \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.15 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 16 \% & 11 \% \
\hline
\end{array}$$ The standard deviations of stocks A and B are _____ and _____, respectively.

Accepted Answer

A)  1.56%; 1.99% 
B)  2.45%; 1.66% 
C)  3.22%; 2.01% 
D)  1.54%; 1.11% 
A)  1.56%; 1.99% 
B)  2.45%; 1.66% 
C)  3.22%; 2.01% 
D)  1.54%; 1.11%

Question 3

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 4

Nonsystematic risk is also referred to as

Accepted Answer

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

Question 5

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 6

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
\hline 1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 15 \% & 8 \% \
\hline
\end{array}$$ 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 are correct. 
A)  9.9%; 3% 
B)  9.9%; 1.1% 
C)  11%; 1.1% 
D)  11%; 3% 
E)  None of the options are correct.

Question 7

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

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 be determined 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 be determined from the information given.

Question 8

The risk that cannot be diversified away is

Accepted Answer

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

Question 9

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 risk-free portfolio that can be formed with the two securities will earn a(n) _____ rate of return.

Accepted Answer

A)  8.5% 
B)  9.0% 
C)  8.9% 
D)  9.9% 
A)  8.5% 
B)  9.0% 
C)  8.9% 
D)  9.9%

Question 10

The standard deviation of a portfolio of risky securities is

Accepted Answer

A)  the square root of the weighted sum of the securities' variances. 
B)  the square root of the sum of the securities' variances. 
C)  the square root of the weighted sum of the securities' variances and covariances. 
D)  the square root of the sum of the securities' covariances. 
A)  the square root of the weighted sum of the securities' variances. 
B)  the square root of the sum of the securities' variances. 
C)  the square root of the weighted sum of the securities' variances and covariances. 
D)  the square root of the sum of the securities' covariances.

Question 11

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 12

Given an optimal risky portfolio with expected return of 20%, 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 13

Given an optimal risky portfolio with expected return of 13%, standard deviation of 26%, and a risk free rate of 5%, 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 14

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. 
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.

Question 15

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 16

Given an optimal risky portfolio with expected return of 6%, 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 17

Consider the following probability distribution for stocks C and D: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock C } & \text { Return on Stock D } \
1 & 0.30 & 7 \% & - 9 \% \
2 & 0.50 & 11 \% & 14 \% \
3 & 0.20 & - 16 \% & 26 \% \
\hline
\end{array}$$ 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 options are correct. 
A)  0.67. 
B)  0.50. 
C)  -0.50. 
D)  -0.67. 
E)  None of the options are correct.

Question 18

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 19

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%

Question 20

Consider the following probability distribution for stocks C and D: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock C } & \text { Return on Stock D } \
1 & 0.30 & 7 \% & - 9 \% \
2 & 0.50 & 11 \% & 14 \% \
3 & 0.20 & - 16 \% & 26 \% \
\hline
\end{array}$$ 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% 
A)  7.62%; 11.24% 
B)  11.24%; 7.62% 
C)  10.35%; 12.93% 
D)  12.93%; 10.35%

Exam 7: Optimal Risky Portfolios

Firm-specific risk is also referred to as

Consider the following probability distribution for stocks A and B: State Probability Return on Stock A 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\% The standard deviations of stocks A and B are _____ and _____, respectively.

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

Nonsystematic risk is also referred to as

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? Portfolio Expected Return Standard Deviation W 9\% 21\% X 5\% 7\% Y 15\% 36\% Z 12\% 15\%

The risk that cannot be diversified away is

The standard deviation of a portfolio of risky securities 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?

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

Given an optimal risky portfolio with expected return of 13%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

The unsystematic risk of a specific security

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

Given an optimal risky portfolio with expected return of 6%, 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 C and D: State Probability Return on Stock C Return on Stock 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

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

Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock 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 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: State Probability Return on Stock A 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\% The standard deviations of stocks A and B are _ and _, respectively.

Consider the following probability distribution for stocks C and D: State Probability Return on Stock C Return on Stock 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.