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Download Fundamentals of Investments 3rd Edition Alexander Test Bank all chapters
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Chapter 8
Chapter 8
Portfolio Analysis
EASY
A 3. The efficient set theorem states that an investor will choose an optimal
portfolio from the set of portfolios that offers
a. maximum expected returns for varying levels of risk
b. minimum expected returns for varying levels of risk
c. the same expected returns for varying levels of risk
d. maximum expected returns at the same levels of risk
C 5. The ______ simply represents all portfolios that could be formed from a
group of known securities.
a. market portfolio
b. efficient set
c. feasible set
d. optimal portfolio
D 6. The market model is a simple linear model that expresses the relationship
between the return on a(n) _____ and the return on a(n) ____ index.
a. market, security
b. security, price
c. bond, bond
d. security, market
62
Portfolio Analysis
A 7. In the market model, the difference between what the return actually is
and what it is expected to be, given the return on the market index, is
attributed to the effect of the ________ term.
a. random error
b. slope
c. intercept
d. return on the security
C 9. Stocks with betas less than one are less volatile than the market index and
are known as _____ stocks.
a. aggressive
b. hedge
c. defensive
d. speculative
D 10. According to the market model, the total risk of any security measured by
its variance consists of ______ risk and _____ risk.
a. expected, unexpected
b. market, inflation
c. interest rate, human
d. market, unique
63
Chapter 8
C 13. The process of selecting securities in a manner that explicitly considers the
standard deviations and correlations of the securities is known as efficient
a. allocation
b. returns
c. diversification
d. risk allocation
D 14. The active ______ is the combinations of securities that offer investors
both maximum expected active return for varying levels of active risk and
minimum active risk for varying levels of expected active return.
a. market portfolio
b. market set
c. feasible set
d. efficient set
A 16. To determine the composition of the portfolios in the efficient set, the
analyst must solve a
a. quadratic program.
b. correlation matrix.
c. expected return vector.
d. probability distribution.
B 17. The "optimal" portfolio will be the one where the investor's indifference
curve touches the efficient set to the furthest
a. north.
b. northwest.
c. southwest.
d. southeast.
B 18. When plotting the risk/return relationships for possible portfolios of two
securities, the lowest standard deviation of the portfolio possibilities
would occur if the correlation coefficient were
a. 0.
b. -1.
c. .5.
d. 1.
64
Portfolio Analysis
D 19. For the market model, each security's error term is assumed to
a. have the same standard deviation.
b. have an expected value of 100%.
c. be in a flat distribution.
d. have an expected value of 0.
C 20. The more positive the slope is for a security's market model,
a. the more defensive the security.
b. the lower the risk-free return.
c. the more sensitive the security's return is to that in the market.
d. the more the market return can change without affecting the
security return.
D 23. Using the market model instead of the full covariance approach
a. does not require the calculation of betas.
b. requires less assumptions.
c. less individual variances need to be estimated.
d. requires less parameter estimate.
65
Chapter 8
MEDIUM
B 27. The efficient set theorem states that an investor will choose an optimal
portfolio from the set of portfolios that offers the following two
conditions:
a. minimum expected returns for varying levels of risk and minimum
risk for varying levels of expected returns
b. maximum expected returns for varying levels of risk and minimum
risk for varying levels of expected returns
c. the same expected returns for varying levels of risk
d. maximum expected returns at the same levels of risk and minimum
risk for varying levels of expected returns
B. 28. Within the feasible set those portfolios offering minimum risk for varying
levels of expected return lie along the __________ boundaries of the
feasible set.
a. northern
b. western
c. eastern
d. southern
C 29. Selection of the ________ portfolio involves the combination of the _____
set and the investor’s ___________ .
a. feasible, efficient, indifference curves
b. optimal, efficient, feasible set
c. optimal, efficient, indifference curves
d. optimal, feasible, indifference curves
66
Portfolio Analysis
A. 31. In general, the more diversified a portfolio (the more the number of
securities in the portfolio),
a. the smaller the weighting of each security
b. the weighting of each security remains constant
c. the greater the weighting of each security
d. the greater the undiversified risk
D 33. The feature that leads to there only being one tangency point between the
indifference curve and the efficient set is the
a. efficient set is convex.
b. indifference curve has a negative slope.
c. efficient set has only N feasible choices.
d. efficient set is concave.
B 34. The portfolio standard deviation will be equal to the weighted average of
its components' standard deviations only if the correlation coefficient for
returns among the components is
a. -1.
b. 1.
c. .5.
d. -.5.
67
Chapter 8
A 35. Plotting any possible risk/return relationships between two securities will
result in a
a. triangle.
b. straight line.
c. trapezoid.
d. series of concentric lines.
C 36. As long as the correlations between the securities are less than 1 or greater
than -1, the northwest portion of their risk/return will
a. consist of one portfolio.
b. not allow an optimal solution.
c. be concave.
d. be a straight line.
B 37. You have developed a market model with a forecasted market return of
15% and an intercept of 6%. A security with a beta of .8 would have an
expected return of
a. 21%.
b. 18%.
c. 12.8%.
d. 16.8%.
C 38. Adding a low beta security to a two-security portfolio will not reduce the
a. portfolio beta.
b. total portfolio risk.
c. market variance.
d. standard deviation of the random error.
B 39. To find the efficient set for 20 securities that may be included in a
portfolio, the analyst must calculate covariances numbering
a. 400.
b. 190.
c. 380.
d. 20.
68
Portfolio Analysis
B 42. When using the market model for portfolio development, the analyst
assumes that the correlation between each security's random error is
a. .5.
b. 0.
c. -.5.
d. -1.
D 43. To use the market model with 25 securities to include in the portfolio, the
number of parameters the analyst must estimate is
a. 27.
b. 300.
c. 125.
d. 77.
C 44. For the market model with 40 securities, the number of parameters the
analyst must estimate for forecasting the portfolio return is
a. 41.
b. 780.
c. 81.
d. 1.
DIFFICULT
C 45. Which one of the following statements is true regarding the variance of
risky portfolios?
a. the higher the correlation coefficient between securities, the greater
will be the reduction in the portfolio variance
b. there is a direct relationship between the securities correlation
coefficient and the portfolio variance
c. the degree to which the portfolio variance is reduced depends on
the degree of correlation between securities
d. proper diversification can reduce or eliminate all of a portfolio’s
risk
69
Chapter 8
C 49. Given the efficient set, risk seeking investors would tend to prefer
portfolios in the ______ region
a. southern
b. northeastern
c. northwestern
d. southeastern
70
Portfolio Analysis
B 51. Your market model has a intercept of 4%, and you forecast a market return
of 10%. If your security has a beta of 1.3 and has an actual return of 12%,
the error term is
a. -8.3%.
b. -5%.
c. 3.2%.
d. 4.6%.
B 52. Security X has a standard deviation of its error term of 7% and a beta of
1.4. If the standard deviation of the market is 12%, the total variance for
Security X is
a. 118.
b. 331.
c. 80.6.
d. 213.
C 53. Security A has a beta of .9 and a standard deviation of its error term of
8%. If the standard deviation of the market is 10%, the total variance for
Security A is
a. 17.2.
b. 73.
c. 145.
d. 154.
D 54. Security Y has a total variance of 225. Its beta is 1.2 and the market
variance is 100. The standard deviation of its random error term is
a. 6%.
b. 14%.
c. 3%.
d. 9%.
A 55. Security B has a total variance of 300 and a random error variance of 121.
If the market variance is 100, its beta is
a. 1.34.
b. 1.22.
c. 1.07.
d. 1.00.
71
Chapter 8
72
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