FIN HW 7

Correlation is the:

extent to which the returns on two assets move together.

An efficient portfolio is a portfolio that does which one of the following?

offers the highest return for a given level of risk

Which of the following statements is false?A) A stock's return is perfectly positively correlated with itself. B) When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. C) The closer the correlation is to -1, the more the returns tend to move in opposite directions. D) The variance of a portfolio depends only on the variance of the individual stocks.

The variance of a portfolio depends only on the variance of the individual stocks.

Which of the following statements is false? A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. B) We can rule out inefficient portfolios because they represent inferior investment choices. C) The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. D) Correlation has no effect on the expected return on a portfolio.

We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility.

Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $89,100. Stock X is worth $57,800. What is the portfolio weight of stock Y?

.351

What is the correlation coefficient of two assets that are uncorrelated?

0

Which of the following statements is false? Which of the following statements is false? A) The covariance and correlation allow us to measure the co-movement of returns. B) Correlation is the expected product of the deviations of two returns. C) Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio. D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

Correlation is the expected product of the deviations of two returns.

Which of the following statements is false? A) When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. B) An investor seeking high returns and low volatility should only invest in an efficient portfolio. C) When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Which of the following statements is false? A) Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1. B) Volatility is the square root of variance. C) The closer the correlation is to 0, the more the returns tend to move together. D) If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive.

The closer the correlation is to 0, the more the returns tend to move together.

Which of the following statements is false? A) The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio. B) The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights. C) The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio. D) The volatility declines as the number of stocks in a portfolio grows.

The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio.

Which of the following statements is false? A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. B) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.

To reduce risk as much as possible, you should combine assets which have one of the following correlation relationships?

strongly negative

The value of an individual security divided by the portfolio value is referred to as the portfolio:

weight.

Diversification is investing in a variety of assets with which one of the following as the primary goal?

reducing some risks

Which of the following statements is false? A) If two stocks move in opposite directions, one will tend to be above average when to other is below average, and the covariance will be negative. B) The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation. C) The covariance of a stock with itself is simply its variance. D) The covariance allows us to gauge the strength of the relationship between stocks.

The covariance allows us to gauge the strength of the relationship between stocks.

Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?

Markowitz efficient frontier

Which of the following statements is false? A) Stock returns will tend to move together if they are affect similarly by economic events. B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. D) With a positive amount invest in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be.

Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together.