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Which of the following correlation coefficients will produce the most diversification benefits?


A) -0.6
B) -0.9
C) 0.0
D) 0.4

E) A) and B)
F) All of the above

Correct Answer

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Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.


A) up, right
B) up, left
C) down, right
D) down, left

E) A) and C)
F) B) and C)

Correct Answer

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The ________ is equal to the square root of the systematic variance divided by the total variance.


A) covariance
B) correlation coefficient
C) standard deviation
D) reward-to-variability ratio

E) B) and C)
F) A) and D)

Correct Answer

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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 correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is _________.


A) 0%
B) 6%
C) 12%
D) 17%

E) A) and B)
F) B) and C)

Correct Answer

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An investor can design a risky portfolio based on two stocks,A and B. The standard deviation of return on stock A is 24% while the standard deviation on stock B is 14%. The correlation coefficient between the return on A and B is 0.35. The expected return on stock A is 25% while on stock B it is 11%. The proportion of the minimum variance portfolio that would be invested in stock B is approximately _________.


A) 45%
B) 67%
C) 85%
D) 92%

E) None of the above
F) A) and B)

Correct Answer

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A stock has a correlation with the market of 0.45.The standard deviation of the market is 21% and the standard deviation of the stock is 35%.What is the stock's beta?


A) 1.00
B) 0.75
C) 0.60
D) 0.55

E) B) and C)
F) A) and D)

Correct Answer

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You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%.You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%.The stock and bond portfolio have a correlation 0.55.The standard deviation of the resulting portfolio will be ________________.


A) more than 18% but less than 24%
B) equal to 18%
C) more than 12% but less than 18%
D) equal to 12%

E) B) and D)
F) A) and B)

Correct Answer

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The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. -Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks? A) Stock A is riskier B) Stock B is riskier C) Both stocks are equally risky D) You cannot tell from the information given. -Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks?


A) Stock A is riskier
B) Stock B is riskier
C) Both stocks are equally risky
D) You cannot tell from the information given.

E) None of the above
F) A) and B)

Correct Answer

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Based on the outcomes in the table below choose which of the statements is/are correct: Based on the outcomes in the table below choose which of the statements is/are correct: I.The covariance of Security A and Security B is zero II.The correlation coefficient between Security A and C is negative III.The correlation coefficient between Security B and C is positive A) I only B) I and II only C) II and III only D) I, II and III I.The covariance of Security A and Security B is zero II.The correlation coefficient between Security A and C is negative III.The correlation coefficient between Security B and C is positive


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

E) A) and B)
F) A) and C)

Correct Answer

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You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen.You must also find that the ____________.


A) covariance between ACE and the market has fallen
B) correlation coefficient between ACE and the market has fallen
C) correlation coefficient between ACE and the market has risen
D) unsystematic risk of ACE has risen

E) All of the above
F) A) and C)

Correct Answer

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Consider two perfectly negatively correlated risky securities,A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum variance portfolio is _________.


A) 10%
B) 20%
C) 40%
D) 60%

E) None of the above
F) All of the above

Correct Answer

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Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two asset portfolio where the correlation coefficient is positive?


A) σ\sigma 2rp < (W12 σ\sigma 12 + W22 σ\sigma 22)
B) σ\sigma 2rp = (W12 σ\sigma 12 + W22 σ\sigma 22)
C) σ\sigma 2rp = (W1212 - W22 σ\sigma 22)
D) σ\sigma 2rp > (W12 σ\sigma 12 + W22 σ\sigma 22)

E) B) and C)
F) A) and C)

Correct Answer

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Market risk is also called __________ and _________.


A) systematic risk, diversifiable risk
B) systematic risk, nondiversifiable risk
C) unique risk, nondiversifiable risk
D) unique risk, diversifiable risk

E) A) and D)
F) B) and C)

Correct Answer

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Suppose that a stock portfolio and a bond portfolio have a zero correlation.This means that ______.


A) the returns on the stock and bond portfolio tend to move inversely
B) the returns on the stock and bond portfolio tend to vary independently of each other
C) the returns on the stock and bond portfolio tend to move together
D) the covariance of the stock and bond portfolio will be positive

E) A) and D)
F) C) and D)

Correct Answer

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Harry Markowitz is best known for his Nobel prize winning work on _____________.


A) strategies for active securities trading
B) techniques used to identify efficient portfolios of risky assets
C) techniques used to measure the systematic risk of securities
D) techniques used in valuing securities options

E) B) and D)
F) A) and C)

Correct Answer

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The _______ decision should take precedence over the _____ decision.


A) asset allocation, stock selection
B) bond selection, mutual fund selection
C) stock selection, asset allocation
D) stock selection, mutual fund selection

E) All of the above
F) A) and D)

Correct Answer

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As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that ________. I.the average risk per year may be smaller over longer investment horizons II.the overall risk of your investment will compound over time III.your overall risk on the investment will fall


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

E) B) and C)
F) A) and D)

Correct Answer

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Which of the following statistics cannot be negative?


A) Covariance
B) Variance
C) E[r]
D) Correlation coefficient

E) All of the above
F) A) and C)

Correct Answer

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The market value weighted average beta of firms included in the market index will always be _____________.


A) 0
B) between 0 and 1
C) 1
D) There is no particular rule concerning the average beta of firms included in the market index

E) B) and C)
F) None of the above

Correct Answer

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Which risk can be diversified away as additional securities are added to a portfolio? I.Total risk II.Systematic risk III.Firm specific risk


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

E) A) and B)
F) B) and D)

Correct Answer

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