Question 1

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 2

The individual investor's optimal portfolio is designated by

Accepted Answer

A)  the point of tangency with the indifference curve and the capital allocation line. 
B)  the point of highest reward to variability ratio in the opportunity set. 
C)  the point of tangency with the opportunity set and the capital allocation line. 
D)  the point of the highest reward to variability ratio in the indifference curve. 
E)  None of the options are correct. 
A)  the point of tangency with the indifference curve and the capital allocation line. 
B)  the point of highest reward to variability ratio in the opportunity set. 
C)  the point of tangency with the opportunity set and the capital allocation line. 
D)  the point of the highest reward to variability ratio in the indifference curve. 
E)  None of the options are correct.

Question 3

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 4

Consider two perfectly negatively correlated risky securities, K and L. K has an expected rate of return of 13% and a standard deviation of 19%. L has an expected rate of return of 10% and a standard deviation of 16%.
The weights of K and L in the global minimum variance portfolio are _____ and _____, respectively.

Accepted Answer

A)  0.24; 0.76 
B)  0.50; 0.50 
C)  0.46; 0.54 
D)  0.45; 0.55 
E)  0.76; 0.24 
A)  0.24; 0.76 
B)  0.50; 0.50 
C)  0.46; 0.54 
D)  0.45; 0.55 
E)  0.76; 0.24

Question 5

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 6

Nondiversifiable risk is also referred to as

Accepted Answer

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

Question 7

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 8

Diversifiable risk is also referred to as

Accepted Answer

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

Question 9

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 10

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

Accepted Answer

A)  13.2%; 9% 
B)  13%; 8.4% 
C)  13.2%; 7.7% 
D)  7.7%; 13.2% 
A)  13.2%; 9% 
B)  13%; 8.4% 
C)  13.2%; 7.7% 
D)  7.7%; 13.2%

Question 11

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. 
B)  borrow some money at the risk-free rate and invest in the optimal risky portfolio. 
C)  invest only in risky securities. 
D)  borrow some money at the risk-free rate, invest in the optimal risky portfolio, and invest only in risky 
E)  Such a portfolio cannot be formed. 
A)  lend some of her money at the risk-free rate. 
B)  borrow some money at the risk-free rate and invest in the optimal risky portfolio. 
C)  invest only in risky securities. 
D)  borrow some money at the risk-free rate, invest in the optimal risky portfolio, and invest only in risky 
E)  Such a portfolio cannot be formed.

Question 12

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 13

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 15 \% & 8 \% \
\hline
\end{array}$$ 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% 
A)  1.5%; 1.9% 
B)  2.5%; 1.1% 
C)  3.2%; 2.0% 
D)  1.5%; 1.1%

Question 14

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 15

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A} & \text {  Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 15 \% & 8 \% \
\hline
\end{array}$$ 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% 
A)  1.5%; 1.9% 
B)  2.2%; 1.2% 
C)  3.2%; 2.0% 
D)  1.5%; 1.1%

Question 16

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Accepted Answer

A)  0.64 
B)  0.14 
C)  0.08 
D)  0.35 
E)  0.36 
A)  0.64 
B)  0.14 
C)  0.08 
D)  0.35 
E)  0.36

Question 17

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } 
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.10 & 10 \% & 8 \% \
2 & 0.20 & 13 \% & 7 \% \
3 & 0.20 & 12 \% & 6 \% \
4 & 0.30 & 14 \% & 9 \% \
5 & 0.20 & 15 \% & 8 \% \
\hline
\end{array}$$ 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

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 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 be determined 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 be determined from the information given.

Question 19

The risk that can be diversified away in a portfolio is referred to as ___________. 
I. diversifiable risk
II. unique risk
III. systematic risk
IV. firm-specific risk

Accepted Answer

A)  I, III, and IV 
B)  II, III, and IV 
C)  III and IV 
D)  I, II, and IV 
E)  I, II, III, and IV 
A)  I, III, and IV 
B)  II, III, and IV 
C)  III and IV 
D)  I, II, and IV 
E)  I, II, III, and IV

Question 20

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 options are correct. 
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 options are correct.

Exam 7: Optimal Risky Portfolios

In a two-security minimum variance portfolio where the correlation between securities is greater than 1.0,

The individual investor's optimal portfolio is designated by

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?

The measure of risk in a Markowitz efficient frontier is

Nondiversifiable risk is also referred to as

Diversifiable risk is also referred to as

Efficient portfolios of N risky securities are portfolios that

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

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 A and B: State Probability Return on Stock A Return on Stock B 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\% The standard deviations of stocks A and B are _____ and _____, respectively.

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

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

Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

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 can be diversified away in a portfolio is referred to as ___________. I. diversifiable risk II. unique risk III. systematic risk IV. firm-specific risk

The variance of a portfolio of risky securities

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

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

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