Question 1

Diversification can reduce or eliminate __________ risk.

Accepted Answer

A)  all 
B)  systematic 
C)  non-systematic 
D)  only an insignificant 
A)  all 
B)  systematic 
C)  non-systematic 
D)  only an insignificant

Question 2

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated.The global minimum variance portfolio has a standard deviation that is always _________.

Accepted Answer

A)  equal to the sum of the securities standard deviations 
B)  equal to -1 
C)  equal to 0 
D)  greater than 0 
A)  equal to the sum of the securities standard deviations 
B)  equal to -1 
C)  equal to 0 
D)  greater than 0

Question 3

What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 30%.Stock B has a standard deviation of 18%.The portfolio contains 60% of stock A and the correlation coefficient between the two stocks is -1.0.

Accepted Answer

A)  0.0% 
B)  10.8% 
C)  18.0% 
D)  24.0% 
A)  0.0% 
B)  10.8% 
C)  18.0% 
D)  24.0%

Question 4

Many current and retired Enron Corp.employees had their 401k retirement accounts wiped out when Enron collapsed because ___.

Accepted Answer

A)  they had to pay huge fines for obstruction of justice 
B)  their 401k accounts were held outside the company 
C)  their 401k accounts were not well diversified 
D)  none of the above 
A)  they had to pay huge fines for obstruction of justice 
B)  their 401k accounts were held outside the company 
C)  their 401k accounts were not well diversified 
D)  none of the above

Question 5

To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by _________.

Accepted Answer

A)  n/(n - 1) 
B)  n * (n - 1) 
C)  (n - 1)/n 
D)  (n - 1) * n 
A)  n/(n - 1) 
B)  n * (n - 1) 
C)  (n - 1)/n 
D)  (n - 1) * n

Question 6

A portfolio of stocks fluctuates when the treasury yields change.Since this risk can not be eliminated through diversification,it is called __________.

Accepted Answer

A)  firm specific risk 
B)  systematic risk 
C)  unique risk 
D)  none of the above 
A)  firm specific risk 
B)  systematic risk 
C)  unique risk 
D)  none of the above

Question 7

Rational risk-averse investors will always prefer portfolios _____________.

Accepted Answer

A)  located on the efficient frontier to those located on the capital market line 
B)  located on the capital market line to those located on the efficient frontier 
C)  at or near the minimum variance point on the efficient frontier 
D)  that are risk-free to all other asset choices 
A)  located on the efficient frontier to those located on the capital market line 
B)  located on the capital market line to those located on the efficient frontier 
C)  at or near the minimum variance point on the efficient frontier 
D)  that are risk-free to all other asset choices

Question 8

Diversification is most effective when security returns are _________.

Accepted Answer

A)  high 
B)  negatively correlated 
C)  positively correlated 
D)  uncorrelated 
A)  high 
B)  negatively correlated 
C)  positively correlated 
D)  uncorrelated

Question 9

The stock is ______ riskier than the typical stock.

Accepted Answer

A)  32% 
B)  15.44% 
C)  12% 
D)  38% 
A)  32% 
B)  15.44% 
C)  12% 
D)  38%

Question 10

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%.
-The standard deviation of return on the optimal risky portfolio is _________.

Accepted Answer

A)  0% 
B)  5% 
C)  7% 
D)  20% 
A)  0% 
B)  5% 
C)  7% 
D)  20%

Question 11

Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?

Accepted Answer

A)  Market risk 
B)  Non-diversifiable risk 
C)  Systematic risk 
D)  Unique risk 
A)  Market risk 
B)  Non-diversifiable risk 
C)  Systematic risk 
D)  Unique risk

Question 12

Beta is a measure of security responsiveness to _________.

Accepted Answer

A)  firm specific risk 
B)  diversifiable risk 
C)  market risk 
D)  unique risk 
A)  firm specific risk 
B)  diversifiable risk 
C)  market risk 
D)  unique risk

Question 13

An investor can design a risky portfolio based on two stocks,A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The expected return on stock A is 20% while on stock B it is 10%. The correlation coefficient between the return on A and B is 0%. The expected return on the minimum variance portfolio is approximately _________.

Accepted Answer

A)  10.00% 
B)  13.60% 
C)  15.00% 
D)  19.41% 
A)  10.00% 
B)  13.60% 
C)  15.00% 
D)  19.41%

Question 14

____ percent of the variance is explained by this regression.

Accepted Answer

A)  12 
B)  35 
C)  4.05 
D)  80 
A)  12 
B)  35 
C)  4.05 
D)  80

Question 15

Reward-to-variability ratios are ________ on the ________ capital market line.

Accepted Answer

A)  lower; steeper 
B)  higher; flatter 
C)  higher; steeper 
D)  the same; flatter 
A)  lower; steeper 
B)  higher; flatter 
C)  higher; steeper 
D)  the same; flatter

Question 16

The part of a stock's return that is systematic is a function of which of the following variables?
I.Volatility in excess returns of the stock market
II.The sensitivity of the stock's returns to changes in the stock market
III.The variance in the stock's returns that is unrelated to the overall stock market

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II and III 
A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II and III

Question 17

You find that the annual standard deviation of a stock's returns is equal to 25%.For a 3 year holding period the standard deviation of your total return would equal _______.

Accepted Answer

A)  75% 
B)  25% 
C)  43% 
D)  55% 
A)  75% 
B)  25% 
C)  43% 
D)  55%

Question 18

A measure of the riskiness of an asset held in isolation is ____________.

Accepted Answer

A)  beta 
B)  standard deviation 
C)  covariance 
D)  semi-variance 
A)  beta 
B)  standard deviation 
C)  covariance 
D)  semi-variance

Question 19

According to Tobin's separation property,portfolio choice can be separated into two independent tasks consisting of __________ and __________.

Accepted Answer

A)  identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs 
B)  identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile 
C)  identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion 
D)  choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate 
A)  identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs 
B)  identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile 
C)  identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion 
D)  choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate

Question 20

The beta of this stock is ____.

Accepted Answer

A)  0.12 
B)  0.35 
C)  1.32 
D)  4.05 
A)  0.12 
B)  0.35 
C)  1.32 
D)  4.05

Diversification can reduce or eliminate __________ risk.

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated.The global minimum variance portfolio has a standard deviation that is always _________.

What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 30%.Stock B has a standard deviation of 18%.The portfolio contains 60% of stock A and the correlation coefficient between the two stocks is -1.0.

Many current and retired Enron Corp.employees had their 401k retirement accounts wiped out when Enron collapsed because ___.

To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by _________.

A portfolio of stocks fluctuates when the treasury yields change.Since this risk can not be eliminated through diversification,it is called __________.

Rational risk-averse investors will always prefer portfolios _____________.

Diversification is most effective when security returns are _________.

The stock is ______ riskier than the typical stock.

Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?

Beta is a measure of security responsiveness to _________.

____ percent of the variance is explained by this regression.

Reward-to-variability ratios are on the capital market line.

You find that the annual standard deviation of a stock's returns is equal to 25%.For a 3 year holding period the standard deviation of your total return would equal _______.

A measure of the riskiness of an asset held in isolation is ____________.

According to Tobin's separation property,portfolio choice can be separated into two independent tasks consisting of and .

The beta of this stock is ____.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

Exam 6: Efficient Diversification

Diversification can reduce or eliminate __________ risk.

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated.The global minimum variance portfolio has a standard deviation that is always _________.

What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 30%.Stock B has a standard deviation of 18%.The portfolio contains 60% of stock A and the correlation coefficient between the two stocks is -1.0.

Many current and retired Enron Corp.employees had their 401k retirement accounts wiped out when Enron collapsed because ___.

To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by _________.

A portfolio of stocks fluctuates when the treasury yields change.Since this risk can not be eliminated through diversification,it is called __________.

Rational risk-averse investors will always prefer portfolios _____________.

Diversification is most effective when security returns are _________.

The stock is ______ riskier than the typical stock.

Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?

Beta is a measure of security responsiveness to _________.

____ percent of the variance is explained by this regression.

Reward-to-variability ratios are ________ on the ________ capital market line.

You find that the annual standard deviation of a stock's returns is equal to 25%.For a 3 year holding period the standard deviation of your total return would equal _______.

A measure of the riskiness of an asset held in isolation is ____________.

According to Tobin's separation property,portfolio choice can be separated into two independent tasks consisting of __________ and __________.

The beta of this stock is ____.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

Reward-to-variability ratios are on the capital market line.

According to Tobin's separation property,portfolio choice can be separated into two independent tasks consisting of and .