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Chapter 6 Efficient Diversification
Chapter 6 Efficient Diversification
1.
2.
The _______ decision should take precedence over the _____ decision.
A.
B.
C.
D.
3.
Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron
collapsed because ___.
A.
B.
C.
D.
4.
unique
firm-specific
diversifiable
all of the above
Based on the outcomes in the table below choose which of the statements is/are correct:
I only
I and II only
II and III only
I, II and III
Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected
return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using
the risk-free asset and ______.
A.
B.
C.
D.
asset A
asset B
no risky asset
can't tell from the data given
6.
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier
_____ and to the ______.
A.
B.
C.
D.
7.
8.
The ________ is equal to the square root of the systematic variance divided by the total variance.
A.
B.
C.
D.
9.
up, right
up, left
down, right
down, left
covariance
correlation coefficient
standard deviation
reward-to-variability ratio
Covariance
Variance
E[r]
Correlation coefficient
10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is
the reward-to-variability ratio?
A.
B.
C.
D.
.40
.50
.75
.80
high
negatively correlated
positively correlated
uncorrelated
beta
firm specific risk
market risk
systematic risk
16. To eliminate the bias in calculating the variance and covariance of returns from historical data the average
squared deviation must be multiplied by _________.
A.
B.
C.
D.
n/(n - 1)
n * (n - 1)
(n - 1)/n
(n - 1) * n
17. 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 _________.
A.
B.
C.
D.
20. Which one of the following stock return statistics fluctuates the most over time?
A.
B.
C.
D.
Covariance of returns
Variance of returns
Average return
Correlation coefficient
21. Harry Markowitz is best known for his Nobel prize winning work on _____________.
A.
B.
C.
D.
22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.
A.
B.
C.
D.
the returns on the stock and bond portfolio tend to move inversely
the returns on the stock and bond portfolio tend to vary independently of each other
the returns on the stock and bond portfolio tend to move together
the covariance of the stock and bond portfolio will be positive
23. 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.
B.
C.
D.
24. On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the
_____________ of the current investment opportunity set.
A.
B.
C.
D.
located on the efficient frontier to those located on the capital market line
located on the capital market line to those located on the efficient frontier
at or near the minimum variance point on the efficient frontier
that are risk-free to all other asset choices
I and II only
II and III only
III and IV only
I and IV only
28. Reward-to-variability ratios are ________ on the ________ capital market line.
A.
B.
C.
D.
lower; steeper
higher; flatter
higher; steeper
the same; flatter
29. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24% while
stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio while stock B
comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient
between the returns on A and B is _________.
A.
B.
C.
D.
0.583
0.225
0.327
0.128
30. The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the
returns on A and B is _________.
A.
B.
C.
D.
.12
.36
.60
.77
31. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while
stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A
and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The
standard deviation of the return on this portfolio is _________.
A.
B.
C.
D.
23.00%
19.76%
18.45%
17.67%
32. The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of
returns on A and B is _________.
A.
B.
C.
D.
-.0447
-.0020
.0020
.0447
33. 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.
B.
C.
D.
10%
20%
40%
60%
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%.
34. The proportion of the optimal risky portfolio that should be invested in stock A is _________.
A.
B.
C.
D.
0%
40%
60%
100%
14.0%
15.6%
16.4%
18.0%
36. The standard deviation of return on the optimal risky portfolio is _________.
A.
B.
C.
D.
0%
5%
7%
20%
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return
of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard
deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free
rate of return is 5%.
37. The proportion of the optimal risky portfolio that should be invested in stock B is approximately
_________.
A.
B.
C.
D.
29%
44%
56%
71%
14%
16%
18%
19%
39. The standard deviation of the returns on the optimal risky portfolio is _________.
A.
B.
C.
D.
25.5%
22.3%
21.4%
20.7%
40. 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.
B.
C.
D.
45%
67%
85%
92%
41. 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 _________.
A.
B.
C.
D.
10.00%
13.60%
15.00%
19.41%
42. 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.
B.
C.
D.
0%
6%
12%
17%
beta
standard deviation
covariance
semi-variance
44. Semitool Corp has an expected excess return of 6% for next year. However for every unexpected 1%
change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out the economy and
the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth
than anticipated, pushing up the stock price by another 1%. Based on this information what was Semitool's
actual excess return?
A.
B.
C.
D.
7.00%
8.50%
8.80%
9.25%
45. 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
A.
B.
C.
D.
I only
I and II only
II and III only
I, II and III
46. Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to
changes in the market as the returns of Stock B.
A.
B.
C.
D.
20% more
slightly more
20% less
slightly less
47. 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.
B.
C.
D.
I only
I and II only
I, II, and III
I and III
48. According to Tobin's separation property, portfolio choice can be separated into two independent tasks
consisting of __________ and __________.
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
49. You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation
coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram
______________________ and the line of best fit has a ______________.
A.
B.
C.
D.
52. 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.
B.
C.
D.
1.00
0.75
0.60
0.55
always positive
always negative
always between positive 1 and negative 1
usually positive, but are not restricted in any particular way
55. The market value weighted average beta of firms included in the market index will always be
_____________.
A.
B.
C.
D.
0
between 0 and 1
1
There is no particular rule concerning the average beta of firms included in the market index
all
systematic
non-systematic
only an insignificant
57. In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a
correlation coefficient of ________.
A.
B.
C.
D.
1.0
0.5
0
-1.0
58. Some diversification benefits can be achieved by combining securities in a portfolio as long as the
correlation between the securities is _____________.
A.
B.
C.
D.
1
less than 1
between 0 and 1
less than or equal to 0
59. If an investor does not diversify their portfolio and instead puts all of their money in one stock, the
appropriate measure of security risk for that investor is the ________.
A.
B.
C.
D.
60. Which of the following provides the best example of a systematic risk event?
A.
B.
C.
D.
75%
25%
43%
55%
0.12
0.35
1.32
4.05
64. This stock has greater systematic risk than a stock with a beta of ___.
A.
B.
C.
D.
0.50
1.50
2.00
3.00
65. The characteristic line for this stock is Rstock = ___ + ___ Rmarket.
A.
B.
C.
D.
0.35, 0.12
4.05, 1.32
15.44, 0.97
0.26, 1.36
12
35
4.05
80
32%
15.44%
12%
38%
68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely _________________________.
A.
B.
C.
D.
69. If you want to know the portfolio standard deviation for a three stock portfolio you will have to
A.
B.
C.
D.
70. Which of the following correlations coefficients will produce the least diversification benefit?
A.
B.
C.
D.
-0.6
-0.3
0.0
0.8
71. Which of the following correlation coefficients will produce the most diversification benefits?
A.
B.
C.
D.
-0.6
-0.9
0.0
0.4
72. What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?
A.
B.
C.
D.
-1.0
0.0
1.0
0.5
73. Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?
A.
B.
C.
D.
Market risk
Non-diversifiable risk
Systematic risk
Unique risk
74. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?
A.
B.
C.
D.
Market risk
Unique risk
Unsystematic risk
With a correlation of 1.0, no risk will be reduced
75. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated
through diversification, it is called __________.
A.
B.
C.
D.
76. 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.
B.
C.
D.
I only
I and II only
III only
I, II and III
77. You are considering adding a new security to your portfolio. In order to decide whether you should add the
security you need to know the security's _______.
I. expected return
II. standard deviation
III. correlation with your portfolio
A.
B.
C.
D.
I only
I and II only
I and III only
I, II and III
78. 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.
B.
C.
D.
79. What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard
deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A and the
correlation coefficient between the two stocks is -.23.
A.
B.
C.
D.
9.7%
12.2%
14.0%
15.6%
80. 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.
A.
B.
C.
D.
0.0%
10.8%
18.0%
24.0%
81. The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is
12.0%, what is the reward to variability ratio of the portfolio?
A.
B.
C.
D.
0.0
0.45
0.74
1.35
82. A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your
money. What is the standard deviation of this investment?
A.
B.
C.
D.
25%
50%
62%
73%
83. A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half your
money. What is the expected return on this investment project?
A.
B.
C.
D.
0%
25%
50%
75%
The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a
market index.
84. Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well
diversified portfolio of common stock?
A.
B.
C.
D.
Stock A
Stock B
There is no difference between A or B
You cannot tell from the information given.
85. Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks?
A.
B.
C.
D.
Stock A is riskier
Stock B is riskier
Both stocks are equally risky
You cannot tell from the information given.
86. Risk that can be eliminated through diversification is called ______ risk.
A.
B.
C.
D.
unique
firm-specific
diversifiable
all of the above
87. The _______ decision should take precedence over the _____ decision.
A.
B.
C.
D.
88. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron
collapsed because ___.
A.
B.
C.
D.
89. Based on the outcomes in the table below choose which of the statements is/are correct:
I only
I and II only
II and III only
I, II and III
90. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected
return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using
the risk-free asset and ______.
A.
B.
C.
D.
asset A
asset B
no risky asset
can't tell from the data given
91. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier
_____ and to the ______.
A.
B.
C.
D.
up, right
up, left
down, right
down, left
92. An investor's degree of risk aversion will determine his or her ______.
A.
B.
C.
D.
93. The ________ is equal to the square root of the systematic variance divided by the total variance.
A.
B.
C.
D.
covariance
correlation coefficient
standard deviation
reward-to-variability ratio
Covariance
Variance
E[r]
Correlation coefficient
95. Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is
the reward-to-variability ratio?
A.
B.
C.
D.
.40
.50
.75
.80
high
negatively correlated
positively correlated
uncorrelated
beta
firm specific risk
market risk
systematic risk
101.To eliminate the bias in calculating the variance and covariance of returns from historical data the average
squared deviation must be multiplied by _________.
A.
B.
C.
D.
n/(n - 1)
n * (n - 1)
(n - 1)/n
(n - 1) * n
102.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 _________.
A.
B.
C.
D.
105.Which one of the following stock return statistics fluctuates the most over time?
A.
B.
C.
D.
Covariance of returns
Variance of returns
Average return
Correlation coefficient
106.Harry Markowitz is best known for his Nobel prize winning work on _____________.
A.
B.
C.
D.
107.Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.
A.
B.
C.
D.
the returns on the stock and bond portfolio tend to move inversely
the returns on the stock and bond portfolio tend to vary independently of each other
the returns on the stock and bond portfolio tend to move together
the covariance of the stock and bond portfolio will be positive
108.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.
B.
C.
D.
109.On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the
_____________ of the current investment opportunity set.
A.
B.
C.
D.
located on the efficient frontier to those located on the capital market line
located on the capital market line to those located on the efficient frontier
at or near the minimum variance point on the efficient frontier
that are risk-free to all other asset choices
I and II only
II and III only
III and IV only
I and IV only
lower; steeper
higher; flatter
higher; steeper
the same; flatter
114.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24% while
stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio while stock B
comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient
between the returns on A and B is _________.
A.
B.
C.
D.
0.583
0.225
0.327
0.128
115.The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the
returns on A and B is _________.
A.
B.
C.
D.
.12
.36
.60
.77
116.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while
stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A
and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The
standard deviation of the return on this portfolio is _________.
A.
B.
C.
D.
23.00%
19.76%
18.45%
17.67%
117.The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of
returns on A and B is _________.
A.
B.
C.
D.
-.0447
-.0020
.0020
.0447
118.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.
B.
C.
D.
10%
20%
40%
60%
119.The proportion of the optimal risky portfolio that should be invested in stock A is _________.
A.
B.
C.
D.
0%
40%
60%
100%
14.0%
15.6%
16.4%
18.0%
0%
5%
7%
20%
122.The proportion of the optimal risky portfolio that should be invested in stock B is approximately
_________.
A.
B.
C.
D.
29%
44%
56%
71%
14%
16%
18%
19%
124.The standard deviation of the returns on the optimal risky portfolio is _________.
A.
B.
C.
D.
25.5%
22.3%
21.4%
20.7%
125.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.
B.
C.
D.
45%
67%
85%
92%
126.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 _________.
A.
B.
C.
D.
10.00%
13.60%
15.00%
19.41%
127.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.
B.
C.
D.
0%
6%
12%
17%
beta
standard deviation
covariance
semi-variance
129.Semitool Corp has an expected excess return of 6% for next year. However for every unexpected 1%
change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out the economy and
the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth
than anticipated, pushing up the stock price by another 1%. Based on this information what was Semitool's
actual excess return?
A.
B.
C.
D.
7.00%
8.50%
8.80%
9.25%
130.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
A.
B.
C.
D.
I only
I and II only
II and III only
I, II and III
131.Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to
changes in the market as the returns of Stock B.
A.
B.
C.
D.
20% more
slightly more
20% less
slightly less
132.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.
B.
C.
D.
I only
I and II only
I, II, and III
I and III
133.According to Tobin's separation property, portfolio choice can be separated into two independent tasks
consisting of __________ and __________.
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
134.You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation
coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram
______________________ and the line of best fit has a ______________.
A.
B.
C.
D.
137.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.
B.
C.
D.
1.00
0.75
0.60
0.55
always positive
always negative
always between positive 1 and negative 1
usually positive, but are not restricted in any particular way
140.The market value weighted average beta of firms included in the market index will always be
_____________.
A.
B.
C.
D.
0
between 0 and 1
1
There is no particular rule concerning the average beta of firms included in the market index
all
systematic
non-systematic
only an insignificant
142.In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a
correlation coefficient of ________.
A.
B.
C.
D.
1.0
0.5
0
-1.0
143.Some diversification benefits can be achieved by combining securities in a portfolio as long as the
correlation between the securities is _____________.
A.
B.
C.
D.
1
less than 1
between 0 and 1
less than or equal to 0
144.If an investor does not diversify their portfolio and instead puts all of their money in one stock, the
appropriate measure of security risk for that investor is the ________.
A.
B.
C.
D.
145.Which of the following provides the best example of a systematic risk event?
A.
B.
C.
D.
147.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.
B.
C.
D.
75%
25%
43%
55%
0.12
0.35
1.32
4.05
149.This stock has greater systematic risk than a stock with a beta of ___.
A.
B.
C.
D.
0.50
1.50
2.00
3.00
150.The characteristic line for this stock is Rstock = ___ + ___ Rmarket.
A.
B.
C.
D.
0.35, 0.12
4.05, 1.32
15.44, 0.97
0.26, 1.36
12
35
4.05
80
32%
15.44%
12%
38%
154.If you want to know the portfolio standard deviation for a three stock portfolio you will have to
A.
B.
C.
D.
155.Which of the following correlations coefficients will produce the least diversification benefit?
A.
B.
C.
D.
-0.6
-0.3
0.0
0.8
156.Which of the following correlation coefficients will produce the most diversification benefits?
A.
B.
C.
D.
-0.6
-0.9
0.0
0.4
157.What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?
A.
B.
C.
D.
-1.0
0.0
1.0
0.5
158.Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?
A.
B.
C.
D.
Market risk
Non-diversifiable risk
Systematic risk
Unique risk
159.Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?
A.
B.
C.
D.
Market risk
Unique risk
Unsystematic risk
With a correlation of 1.0, no risk will be reduced
160.A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated
through diversification, it is called __________.
A.
B.
C.
D.
161.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.
B.
C.
D.
I only
I and II only
III only
I, II and III
162.You are considering adding a new security to your portfolio. In order to decide whether you should add the
security you need to know the security's _______.
I. expected return
II. standard deviation
III. correlation with your portfolio
A.
B.
C.
D.
I only
I and II only
I and III only
I, II and III
163.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.
B.
C.
D.
164.What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard
deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A and the
correlation coefficient between the two stocks is -.23.
A.
B.
C.
D.
9.7%
12.2%
14.0%
15.6%
165.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.
A.
B.
C.
D.
0.0%
10.8%
18.0%
24.0%
166.The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is
12.0%, what is the reward to variability ratio of the portfolio?
A.
B.
C.
D.
0.0
0.45
0.74
1.35
167.A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your
money. What is the standard deviation of this investment?
A.
B.
C.
D.
25%
50%
62%
73%
168.A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half your
money. What is the expected return on this investment project?
A.
B.
C.
D.
0%
25%
50%
75%
169.Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well
diversified portfolio of common stock?
A.
B.
C.
D.
Stock A
Stock B
There is no difference between A or B
You cannot tell from the information given.
170.Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks?
A.
B.
C.
D.
Stock A is riskier
Stock B is riskier
Both stocks are equally risky
You cannot tell from the information given.
6 Key
1.
unique
firm-specific
diversifiable
all of the above
Bodie - Chapter 06 #1
Difficulty: Easy
2.
The _______ decision should take precedence over the _____ decision.
A.
B.
C.
D.
3.
Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when
Enron collapsed because ___.
A.
B.
C.
D.
4.
Based on the outcomes in the table below choose which of the statements is/are correct:
I only
I and II only
II and III only
I, II and III
Bodie - Chapter 06 #4
Difficulty: Hard
5.
Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected
return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio
using the risk-free asset and ______.
A.
B.
C.
D.
asset A
asset B
no risky asset
can't tell from the data given
Bodie - Chapter 06 #5
Difficulty: Medium
6.
Adding additional risky assets to the investment opportunity set will generally move the efficient
frontier _____ and to the ______.
A.
B.
C.
D.
up, right
up, left
down, right
down, left
Bodie - Chapter 06 #6
Difficulty: Medium
7.
8.
The ________ is equal to the square root of the systematic variance divided by the total variance.
A.
B.
C.
D.
covariance
correlation coefficient
standard deviation
reward-to-variability ratio
Bodie - Chapter 06 #8
Difficulty: Medium
9.
Covariance
Variance
E[r]
Correlation coefficient
Bodie - Chapter 06 #9
Difficulty: Easy
10.
Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What
is the reward-to-variability ratio?
A.
B.
C.
D.
.40
.50
.75
.80
11.
12.
high
negatively correlated
positively correlated
uncorrelated
Bodie - Chapter 06 #12
Difficulty: Easy
13.
14.
15.
beta
firm specific risk
market risk
systematic risk
Bodie - Chapter 06 #15
Difficulty: Easy
16.
To eliminate the bias in calculating the variance and covariance of returns from historical data the
average squared deviation must be multiplied by _________.
A.
B.
C.
D.
n/(n - 1)
n * (n - 1)
(n - 1)/n
(n - 1) * n
Bodie - Chapter 06 #16
Difficulty: Medium
17.
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 _________.
A.
B.
C.
D.
18.
19.
20.
Which one of the following stock return statistics fluctuates the most over time?
A.
B.
C.
D.
Covariance of returns
Variance of returns
Average return
Correlation coefficient
Bodie - Chapter 06 #20
Difficulty: Medium
21.
Harry Markowitz is best known for his Nobel prize winning work on _____________.
A.
B.
C.
D.
22.
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.
A.
B.
C.
D.
the returns on the stock and bond portfolio tend to move inversely
the returns on the stock and bond portfolio tend to vary independently of each other
the returns on the stock and bond portfolio tend to move together
the covariance of the stock and bond portfolio will be positive
Bodie - Chapter 06 #22
Difficulty: Easy
23.
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.
B.
C.
D.
24.
On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the
_____________ of the current investment opportunity set.
A.
B.
C.
D.
25.
26.
located on the efficient frontier to those located on the capital market line
located on the capital market line to those located on the efficient frontier
at or near the minimum variance point on the efficient frontier
that are risk-free to all other asset choices
Bodie - Chapter 06 #26
Difficulty: Easy
27.
I and II only
II and III only
III and IV only
I and IV only
Bodie - Chapter 06 #27
Difficulty: Medium
28.
lower; steeper
higher; flatter
higher; steeper
the same; flatter
Bodie - Chapter 06 #28
Difficulty: Medium
29.
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%
while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio
while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the
correlation coefficient between the returns on A and B is _________.
A.
B.
C.
D.
0.583
0.225
0.327
0.128
30.
The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between
the returns on A and B is _________.
A.
B.
C.
D.
.12
.36
.60
.77
Correlation =
Bodie - Chapter 06 #30
Difficulty: Medium
31.
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%
while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns
on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the
portfolio. The standard deviation of the return on this portfolio is _________.
A.
B.
C.
D.
23.00%
19.76%
18.45%
17.67%
32.
The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance
of returns on A and B is _________.
A.
B.
C.
D.
-.0447
-.0020
.0020
.0447
33.
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.
B.
C.
D.
10%
20%
40%
60%
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%.
Bodie - Chapter 06
34.
The proportion of the optimal risky portfolio that should be invested in stock A is _________.
A.
B.
C.
D.
0%
40%
60%
100%
35.
14.0%
15.6%
16.4%
18.0%
36.
0%
5%
7%
20%
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected
return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a
standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4.
The risk-free rate of return is 5%.
Bodie - Chapter 06
37.
The proportion of the optimal risky portfolio that should be invested in stock B is approximately
_________.
A.
B.
C.
D.
29%
44%
56%
71%
WB = 71%
Bodie - Chapter 06 #37
Difficulty: Hard
38.
14%
16%
18%
19%
39.
The standard deviation of the returns on the optimal risky portfolio is _________.
A.
B.
C.
D.
25.5%
22.3%
21.4%
20.7%
40.
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.
B.
C.
D.
45%
67%
85%
92%
WB =
WB =
Bodie - Chapter 06 #40
Difficulty: Hard
41.
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 _________.
A.
B.
C.
D.
10.00%
13.60%
15.00%
19.41%
42.
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.
B.
C.
D.
0%
6%
12%
17%
43.
beta
standard deviation
covariance
semi-variance
Bodie - Chapter 06 #43
Difficulty: Easy
44.
Semitool Corp has an expected excess return of 6% for next year. However for every unexpected 1%
change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out the economy
and the stock market do better than expected by 1.5% and Semitool's products experience more rapid
growth than anticipated, pushing up the stock price by another 1%. Based on this information what was
Semitool's actual excess return?
A.
B.
C.
D.
7.00%
8.50%
8.80%
9.25%
6% + (1.5%)(1.2) + 1% = 8.8%
Bodie - Chapter 06 #44
Difficulty: Medium
45.
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
A.
B.
C.
D.
I only
I and II only
II and III only
I, II and III
Bodie - Chapter 06 #45
Difficulty: Easy
46.
Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to
changes in the market as the returns of Stock B.
A.
B.
C.
D.
20% more
slightly more
20% less
slightly less
Bodie - Chapter 06 #46
Difficulty: Easy
47.
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.
B.
C.
D.
I only
I and II only
I, II, and III
I and III
Bodie - Chapter 06 #47
Difficulty: Easy
48.
According to Tobin's separation property, portfolio choice can be separated into two independent tasks
consisting of __________ and __________.
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
Bodie - Chapter 06 #48
Difficulty: Medium
49.
You are constructing a scatter plot of excess returns for Stock A versus the market index. If the
correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter
diagram ______________________ and the line of best fit has a ______________.
A.
B.
C.
D.
50.
51.
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.
B.
C.
D.
52.
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.
B.
C.
D.
1.00
0.75
0.60
0.55
=
Bodie - Chapter 06 #52
Difficulty: Medium
53.
always positive
always negative
always between positive 1 and negative 1
usually positive, but are not restricted in any particular way
Bodie - Chapter 06 #53
Difficulty: Easy
54.
55.
The market value weighted average beta of firms included in the market index will always be
_____________.
A.
B.
C.
D.
0
between 0 and 1
1
There is no particular rule concerning the average beta of firms included in the market index
Bodie - Chapter 06 #55
Difficulty: Easy
56.
all
systematic
non-systematic
only an insignificant
Bodie - Chapter 06 #56
Difficulty: Easy
57.
In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with
a correlation coefficient of ________.
A.
B.
C.
D.
1.0
0.5
0
-1.0
Bodie - Chapter 06 #57
Difficulty: Easy
58.
Some diversification benefits can be achieved by combining securities in a portfolio as long as the
correlation between the securities is _____________.
A.
B.
C.
D.
1
less than 1
between 0 and 1
less than or equal to 0
Bodie - Chapter 06 #58
Difficulty: Easy
59.
If an investor does not diversify their portfolio and instead puts all of their money in one stock, the
appropriate measure of security risk for that investor is the ________.
A.
B.
C.
D.
60.
Which of the following provides the best example of a systematic risk event?
A.
B.
C.
D.
61.
I only
II only
II and III only
I, II and III
None of the statements are correct
Bodie - Chapter 06 #61
Difficulty: Medium
62.
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.
B.
C.
D.
75%
25%
43%
55%
Bodie - Chapter 06
63.
0.12
0.35
1.32
4.05
64.
This stock has greater systematic risk than a stock with a beta of ___.
A.
B.
C.
D.
0.50
1.50
2.00
3.00
65.
The characteristic line for this stock is Rstock = ___ + ___ Rmarket.
A.
B.
C.
D.
0.35, 0.12
4.05, 1.32
15.44, 0.97
0.26, 1.36
66.
12
35
4.05
80
67.
32%
15.44%
12%
38%
Beta of 1.32 means that this stock is 32% riskier than the market.
Bodie - Chapter 06 #67
Difficulty: Medium
68.
69.
If you want to know the portfolio standard deviation for a three stock portfolio you will have to
A.
B.
C.
D.
70.
Which of the following correlations coefficients will produce the least diversification benefit?
A.
B.
C.
D.
-0.6
-0.3
0.0
0.8
Bodie - Chapter 06 #70
Difficulty: Easy
71.
Which of the following correlation coefficients will produce the most diversification benefits?
A.
B.
C.
D.
-0.6
-0.9
0.0
0.4
Bodie - Chapter 06 #71
Difficulty: Easy
72.
What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?
A.
B.
C.
D.
-1.0
0.0
1.0
0.5
Bodie - Chapter 06 #72
Difficulty: Easy
73.
Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?
A.
B.
C.
D.
Market risk
Non-diversifiable risk
Systematic risk
Unique risk
Bodie - Chapter 06 #73
Difficulty: Easy
74.
Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?
A.
B.
C.
D.
Market risk
Unique risk
Unsystematic risk
With a correlation of 1.0, no risk will be reduced
Bodie - Chapter 06 #74
Difficulty: Easy
75.
A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated
through diversification, it is called __________.
A.
B.
C.
D.
76.
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.
B.
C.
D.
I only
I and II only
III only
I, II and III
Bodie - Chapter 06 #76
Difficulty: Medium
77.
You are considering adding a new security to your portfolio. In order to decide whether you should add
the security you need to know the security's _______.
I. expected return
II. standard deviation
III. correlation with your portfolio
A.
B.
C.
D.
I only
I and II only
I and III only
I, II and III
Bodie - Chapter 06 #77
Difficulty: Medium
78.
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.
B.
C.
D.
79.
What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a
standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of
stock A and the correlation coefficient between the two stocks is -.23.
A.
B.
C.
D.
9.7%
12.2%
14.0%
15.6%
80.
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.
A.
B.
C.
D.
0.0%
10.8%
18.0%
24.0%
81.
The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation
is 12.0%, what is the reward to variability ratio of the portfolio?
A.
B.
C.
D.
0.0
0.45
0.74
1.35
82.
A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half
your money. What is the standard deviation of this investment?
A.
B.
C.
D.
25%
50%
62%
73%
83.
A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half
your money. What is the expected return on this investment project?
A.
B.
C.
D.
0%
25%
50%
75%
The figures below show plots of monthly excess returns for two stocks plotted against excess returns for
a market index.
Bodie - Chapter 06
84.
Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well
diversified portfolio of common stock?
A.
B.
C.
D.
Stock A
Stock B
There is no difference between A or B
You cannot tell from the information given.
Bodie - Chapter 06 #84
Difficulty: Medium
85.
Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks?
A.
B.
C.
D.
Stock A is riskier
Stock B is riskier
Both stocks are equally risky
You cannot tell from the information given.
Bodie - Chapter 06 #85
Difficulty: Medium
86.
unique
firm-specific
diversifiable
all of the above
Bodie - Chapter 06 #1
Difficulty: Easy
87.
The _______ decision should take precedence over the _____ decision.
A.
B.
C.
D.
88.
Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when
Enron collapsed because ___.
A.
B.
C.
D.
89.
Based on the outcomes in the table below choose which of the statements is/are correct:
I only
I and II only
II and III only
I, II and III
Bodie - Chapter 06 #4
Difficulty: Hard
90.
Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected
return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio
using the risk-free asset and ______.
A.
B.
C.
D.
asset A
asset B
no risky asset
can't tell from the data given
Bodie - Chapter 06 #5
Difficulty: Medium
91.
Adding additional risky assets to the investment opportunity set will generally move the efficient
frontier _____ and to the ______.
A.
B.
C.
D.
up, right
up, left
down, right
down, left
Bodie - Chapter 06 #6
Difficulty: Medium
92.
93.
The ________ is equal to the square root of the systematic variance divided by the total variance.
A.
B.
C.
D.
covariance
correlation coefficient
standard deviation
reward-to-variability ratio
Bodie - Chapter 06 #8
Difficulty: Medium
94.
Covariance
Variance
E[r]
Correlation coefficient
Bodie - Chapter 06 #9
Difficulty: Easy
95.
Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What
is the reward-to-variability ratio?
A.
B.
C.
D.
.40
.50
.75
.80
96.
97.
high
negatively correlated
positively correlated
uncorrelated
Bodie - Chapter 06 #12
Difficulty: Easy
98.
99.
100.
beta
firm specific risk
market risk
systematic risk
Bodie - Chapter 06 #15
Difficulty: Easy
101.
To eliminate the bias in calculating the variance and covariance of returns from historical data the
average squared deviation must be multiplied by _________.
A.
B.
C.
D.
n/(n - 1)
n * (n - 1)
(n - 1)/n
(n - 1) * n
Bodie - Chapter 06 #16
Difficulty: Medium
102.
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 _________.
A.
B.
C.
D.
103.
104.
105.
Which one of the following stock return statistics fluctuates the most over time?
A.
B.
C.
D.
Covariance of returns
Variance of returns
Average return
Correlation coefficient
Bodie - Chapter 06 #20
Difficulty: Medium
106.
Harry Markowitz is best known for his Nobel prize winning work on _____________.
A.
B.
C.
D.
107.
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.
A.
B.
C.
D.
the returns on the stock and bond portfolio tend to move inversely
the returns on the stock and bond portfolio tend to vary independently of each other
the returns on the stock and bond portfolio tend to move together
the covariance of the stock and bond portfolio will be positive
Bodie - Chapter 06 #22
Difficulty: Easy
108.
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.
B.
C.
D.
109.
On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the
_____________ of the current investment opportunity set.
A.
B.
C.
D.
110.
111.
located on the efficient frontier to those located on the capital market line
located on the capital market line to those located on the efficient frontier
at or near the minimum variance point on the efficient frontier
that are risk-free to all other asset choices
Bodie - Chapter 06 #26
Difficulty: Easy
112.
I and II only
II and III only
III and IV only
I and IV only
Bodie - Chapter 06 #27
Difficulty: Medium
113.
lower; steeper
higher; flatter
higher; steeper
the same; flatter
Bodie - Chapter 06 #28
Difficulty: Medium
114.
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%
while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio
while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the
correlation coefficient between the returns on A and B is _________.
A.
B.
C.
D.
0.583
0.225
0.327
0.128
115.
The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between
the returns on A and B is _________.
A.
B.
C.
D.
.12
.36
.60
.77
Correlation =
Bodie - Chapter 06 #30
Difficulty: Medium
116.
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%
while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns
on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the
portfolio. The standard deviation of the return on this portfolio is _________.
A.
B.
C.
D.
23.00%
19.76%
18.45%
17.67%
117.
The standard deviation of return on investment A is .10 while the standard deviation of return on
investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance
of returns on A and B is _________.
A.
B.
C.
D.
-.0447
-.0020
.0020
.0447
118.
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.
B.
C.
D.
10%
20%
40%
60%
119.
The proportion of the optimal risky portfolio that should be invested in stock A is _________.
A.
B.
C.
D.
0%
40%
60%
100%
120.
14.0%
15.6%
16.4%
18.0%
121.
0%
5%
7%
20%
122.
The proportion of the optimal risky portfolio that should be invested in stock B is approximately
_________.
A.
B.
C.
D.
29%
44%
56%
71%
WB = 71%
Bodie - Chapter 06 #37
Difficulty: Hard
123.
14%
16%
18%
19%
124.
The standard deviation of the returns on the optimal risky portfolio is _________.
A.
B.
C.
D.
25.5%
22.3%
21.4%
20.7%
125.
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.
B.
C.
D.
45%
67%
85%
92%
WB =
WB =
Bodie - Chapter 06 #40
Difficulty: Hard
126.
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 _________.
A.
B.
C.
D.
10.00%
13.60%
15.00%
19.41%
127.
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.
B.
C.
D.
0%
6%
12%
17%
128.
beta
standard deviation
covariance
semi-variance
Bodie - Chapter 06 #43
Difficulty: Easy
129.
Semitool Corp has an expected excess return of 6% for next year. However for every unexpected 1%
change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out the economy
and the stock market do better than expected by 1.5% and Semitool's products experience more rapid
growth than anticipated, pushing up the stock price by another 1%. Based on this information what was
Semitool's actual excess return?
A.
B.
C.
D.
7.00%
8.50%
8.80%
9.25%
6% + (1.5%)(1.2) + 1% = 8.8%
Bodie - Chapter 06 #44
Difficulty: Medium
130.
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
A.
B.
C.
D.
I only
I and II only
II and III only
I, II and III
Bodie - Chapter 06 #45
Difficulty: Easy
131.
Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to
changes in the market as the returns of Stock B.
A.
B.
C.
D.
20% more
slightly more
20% less
slightly less
Bodie - Chapter 06 #46
Difficulty: Easy
132.
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.
B.
C.
D.
I only
I and II only
I, II, and III
I and III
Bodie - Chapter 06 #47
Difficulty: Easy
133.
According to Tobin's separation property, portfolio choice can be separated into two independent tasks
consisting of __________ and __________.
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
Bodie - Chapter 06 #48
Difficulty: Medium
134.
You are constructing a scatter plot of excess returns for Stock A versus the market index. If the
correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter
diagram ______________________ and the line of best fit has a ______________.
A.
B.
C.
D.
135.
136.
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.
B.
C.
D.
137.
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.
B.
C.
D.
1.00
0.75
0.60
0.55
=
Bodie - Chapter 06 #52
Difficulty: Medium
138.
always positive
always negative
always between positive 1 and negative 1
usually positive, but are not restricted in any particular way
Bodie - Chapter 06 #53
Difficulty: Easy
139.
140.
The market value weighted average beta of firms included in the market index will always be
_____________.
A.
B.
C.
D.
0
between 0 and 1
1
There is no particular rule concerning the average beta of firms included in the market index
Bodie - Chapter 06 #55
Difficulty: Easy
141.
all
systematic
non-systematic
only an insignificant
Bodie - Chapter 06 #56
Difficulty: Easy
142.
In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with
a correlation coefficient of ________.
A.
B.
C.
D.
1.0
0.5
0
-1.0
Bodie - Chapter 06 #57
Difficulty: Easy
143.
Some diversification benefits can be achieved by combining securities in a portfolio as long as the
correlation between the securities is _____________.
A.
B.
C.
D.
1
less than 1
between 0 and 1
less than or equal to 0
Bodie - Chapter 06 #58
Difficulty: Easy
144.
If an investor does not diversify their portfolio and instead puts all of their money in one stock, the
appropriate measure of security risk for that investor is the ________.
A.
B.
C.
D.
145.
Which of the following provides the best example of a systematic risk event?
A.
B.
C.
D.
146.
I only
II only
II and III only
I, II and III
None of the statements are correct
Bodie - Chapter 06 #61
Difficulty: Medium
147.
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.
B.
C.
D.
75%
25%
43%
55%
148.
0.12
0.35
1.32
4.05
149.
This stock has greater systematic risk than a stock with a beta of ___.
A.
B.
C.
D.
0.50
1.50
2.00
3.00
150.
The characteristic line for this stock is Rstock = ___ + ___ Rmarket.
A.
B.
C.
D.
0.35, 0.12
4.05, 1.32
15.44, 0.97
0.26, 1.36
151.
12
35
4.05
80
152.
32%
15.44%
12%
38%
Beta of 1.32 means that this stock is 32% riskier than the market.
Bodie - Chapter 06 #67
Difficulty: Medium
153.
154.
If you want to know the portfolio standard deviation for a three stock portfolio you will have to
A.
B.
C.
D.
155.
Which of the following correlations coefficients will produce the least diversification benefit?
A.
B.
C.
D.
-0.6
-0.3
0.0
0.8
Bodie - Chapter 06 #70
Difficulty: Easy
156.
Which of the following correlation coefficients will produce the most diversification benefits?
A.
B.
C.
D.
-0.6
-0.9
0.0
0.4
Bodie - Chapter 06 #71
Difficulty: Easy
157.
What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?
A.
B.
C.
D.
-1.0
0.0
1.0
0.5
Bodie - Chapter 06 #72
Difficulty: Easy
158.
Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?
A.
B.
C.
D.
Market risk
Non-diversifiable risk
Systematic risk
Unique risk
Bodie - Chapter 06 #73
Difficulty: Easy
159.
Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?
A.
B.
C.
D.
Market risk
Unique risk
Unsystematic risk
With a correlation of 1.0, no risk will be reduced
Bodie - Chapter 06 #74
Difficulty: Easy
160.
A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated
through diversification, it is called __________.
A.
B.
C.
D.
161.
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.
B.
C.
D.
I only
I and II only
III only
I, II and III
Bodie - Chapter 06 #76
Difficulty: Medium
162.
You are considering adding a new security to your portfolio. In order to decide whether you should add
the security you need to know the security's _______.
I. expected return
II. standard deviation
III. correlation with your portfolio
A.
B.
C.
D.
I only
I and II only
I and III only
I, II and III
Bodie - Chapter 06 #77
Difficulty: Medium
163.
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.
B.
C.
D.
164.
What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a
standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of
stock A and the correlation coefficient between the two stocks is -.23.
A.
B.
C.
D.
9.7%
12.2%
14.0%
15.6%
165.
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.
A.
B.
C.
D.
0.0%
10.8%
18.0%
24.0%
166.
The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation
is 12.0%, what is the reward to variability ratio of the portfolio?
A.
B.
C.
D.
0.0
0.45
0.74
1.35
167.
A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half
your money. What is the standard deviation of this investment?
A.
B.
C.
D.
25%
50%
62%
73%
168.
A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half
your money. What is the expected return on this investment project?
A.
B.
C.
D.
0%
25%
50%
75%
169.
Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well
diversified portfolio of common stock?
A.
B.
C.
D.
Stock A
Stock B
There is no difference between A or B
You cannot tell from the information given.
Bodie - Chapter 06 #84
Difficulty: Medium
170.
Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks?
A.
B.
C.
D.
Stock A is riskier
Stock B is riskier
Both stocks are equally risky
You cannot tell from the information given.
Bodie - Chapter 06 #85
Difficulty: Medium
6 Summary
Category
Bodie - Chapter 06
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
# of
Questions
174
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