FINC 635 Ch11 Quiz

The standard deviation of a risk-free asset is 0. −1. +1. between 0 and −1. between 0 and +1.

0.

A portfolio consists of two stocks with Stock A having a weight of 41 percent. Stock A has a standard deviation of 16.78 percent, and Stock B's standard deviation is 8.44 percent. The stocks have a covariance of −0.0063. What is the portfolio variance? 0.001253 0.004165 0.004961 0.019097 0.034141

0.004165

The probabilities of an economic boom, normal economy, and a recession are 2 percent, 93 percent, and 5 percent, respectively. For these economic states, Stock A has deviations from its expected returns of 0.04, 0.07, and −0.11 for the three economic states respectively. Stock B has deviations from its expected returns of 0.14, 0.08, and −0.22 for the three economic states, respectively. What is the covariance of the two stocks? 0.00653 -0.00743 -0.00589 0.00974 0.00802

0.00653

A portfolio is equally weighted. Stock D has a standard deviation of 11.7, percent and Stock E has a standard deviation of 5.9 percent. The securities have a covariance of 0.0254. What is the portfolio variance? 0.012209 0.009006 0.010549 0.008590 0.016993

0.016993

The variance of Stock A is 0.005492, the variance of Stock B is 0.012394, and the covariance between the two is 0.0034. What is the correlation coefficient? 0.4284 0.3542 0.4010 0.4121 0.3510

0.4121

A portfolio consists of $38,312 of Stock A, $42,509 of Stock B, and $11,516 of Stock C. The expected returns on Stocks A, B, and C are 6.85 percent, 12.08 percent, and 15.92 percent, respectively. What is the portfolio expected rate of return? 9.98% 11.21% 11.88% 10.39% 12.07%

10.39%

KNF stock is quite cyclical. In a boom economy, the stock is expected to return 34 percent in comparison to 13 percent in a normal economy and a negative 22 percent in a recessionary period. The probability of a recession is 15 percent while the chance of a boom is 4 percent. What is the standard deviation of the returns this stock? 14.15% 13.68/% 13.49% 14.46% 15.04%

13.49%

Which one of the following would tend to indicate that a portfolio is being effectively diversified? A decrease in the portfolio standard deviation An increase in the portfolio rate of return An increase in the portfolio beta An increase in the portfolio standard deviation A constant portfolio beta

A decrease in the portfolio standard deviation

Which one of the following is an example of systematic risk? A poorly managed company suddenly goes out of business due to slow sales. An efficient company reduces its work force and automates several jobs. A key company employee suddenly resigns and accepts employment with a competitor. A well respected chairman of the Federal Reserve suddenly resigns. An unpopular president of a firm suddenly resigns.

A well respected chairman of the Federal Reserve suddenly resigns.

Which one of these statements is correct regarding a portfolio of two risky securities? Both the rate of return and the standard deviation of a portfolio can be changed by changing the portfolio weights. The opportunity set is represented by a forward bending curve when expected returns are graphed against standard deviation. Diversification occurs when the correlation between two securities is +1. The standard deviation of a portfolio cannot be lower than the weighted average standard deviation of the securities held within the portfolio. The minimum variance portfolio of two stocks also represents the portfolio's highest possible rate of return.

Both the rate of return and the standard deviation of a portfolio can be changed by changing the portfolio weights.

Which one of these measures the interrelationship between two securities? Standard deviation Variance Beta Covariance Alpha

Covariance

Which one of the following is the best example of systematic risk? The price of tomatoes declines sharply. Inflation rises unexpectedly. Commercial airline pilots go on strike. A hurricane hits a tourist destination. People become diet conscious and avoid fast food restaurants.

Inflation rises unexpectedly.

Assume you are looking at a security market line graph. Where would an overpriced stock with a beta of 0.98 plot on that graph? To the right of the market and below the security market line To the left of the market and below the security market line To the right of the market and above the security market line To the left of the market and above the security market line To the right of the market on the security market line

To the left of the market and below the security market line

Amy has a portfolio with a beta of 1.26 but has decided to lower her investment risk. Adding which one of the following securities to her portfolio is most assuredly going to lower the risk of the portfolio? A stock that has a covariance with the market of 0.89 A security that has a standard deviation of 11 percent A security with a beta of 1.58 U.S. Treasury bills A mix of small-company and large-company stocks

U.S. Treasury bills

Which one of these measures the squared deviations of actual returns from expected returns? Variance Covariance Beta Correlation Alpha

Variance

You plotted the monthly rate of return for two securities against time for the past 48 months. If the pattern of the movements of these two sets of returns rose and fell together the majority, but not all, of the time, then the securities have no correlation at all. a weak negative correlation. a strong negative correlation. a strong positive correlation. a perfect positive correlation.

a strong positive correlation.

The systematic risk of the market is assigned a beta of 1. beta of 0. standard deviation of 1. standard deviation of 0. variance of 1.

beta of 1.

Unsystematic risk can be effectively eliminated through portfolio diversification. is measured by beta. is compensated for by the risk premium. is nondiversifiable. is related to the overall economy.

can be effectively eliminated through portfolio diversification.

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the capital market line that shows that investors will only invest in the riskless asset. capital market line that shows that investors will invest in a combination of the riskless asset and the tangency portfolio. security market line that shows that all investors will invest in the riskless asset only. security market line that shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. capital market line that shows that investors will invest at the vertical intercept point of that line.

capital market line that shows that investors will invest in a combination of the riskless asset and the tangency portfolio.

The risk of an individual security that will be compensated by the market depends upon the standard deviation of that security. covariance of that security with the market. expected rate of return on that security. security's historical variance. industry most associated with that security.

covariance of that security with the market.

The beta of a security is calculated by dividing the variance of the market by the covariance of the security with the market. correlation of the security with the market by the variance of the security. variance of the market by the correlation of the security with the market. covariance of the security with the market by the variance of the market. covariance of the security with the market by the variance of the security.

covariance of the security with the market by the variance of the market.

The correlation between stocks A and B is equal to the standard deviation of A divided by the standard deviation of B. covarianceAB divided by the product of the standard deviations of A and B. standard deviation of B divided by the covarianceAB. sum of the variances of A and B divided by the covarianceAB. product of the standard deviation of A multiplied by the standard deviation of B divided by covarianceAB.

covarianceAB divided by the product of the standard deviations of A and B.

For an individual investor, the ideal portfolio could best be described as the portfolio that has the lowest standard deviation given a specific expected rate of return. lies above and to the left of the feasible set. produces the highest rate of return. qualifies as the minimum variance portfolio. lies within the feasible set.

has the lowest standard deviation given a specific expected rate of return.

When computing the expected return on a portfolio of stocks the portfolio weights are based on the number of shares owned in each stock. price per share of each stock. market value of the total shares held in each stock. original amount invested in each stock. cost per share of each stock held.

market value of the total shares held in each stock.

If a stock portfolio is well diversified, then the portfolio variance must be equal to or greater than the variance of the least risky stock in the portfolio. will be a weighted average of the variances of the individual securities in the portfolio. will equal the variance of the most volatile stock in the portfolio. will be an arithmetic average of the variances of the individual securities in the portfolio. may be less than the variance of the least risky stock in the portfolio.

may be less than the variance of the least risky stock in the portfolio.

A security that is fairly priced will have a return that lies _____ the security market line. below on or below on on or above above

on

The market risk premium is computed by adding the risk-free rate of return to the inflation rate. adding the risk-free rate of return to the market rate of return. subtracting the risk-free rate of return from the inflation rate. subtracting the risk-free rate of return from the market rate of return. multiplying the risk-free rate of return by a beta of one.

subtracting the risk-free rate of return from the market rate of return.

A negative covariance between the returns of Stock A and Stock B indicates that market prices of Stock A and Stock B move in tandem when their returns are declining. the return on one stock will exceed that stock's average return when the second stock has a return that is less than its average. a portfolio investing equally in Stocks A and B will have a negative expected rate of return. both Stock A and Stock B have negative rates of return for the period. one stock has a negative rate of return while the other stock has a positive rate of return for the period.

the return on one stock will exceed that stock's average return when the second stock has a return that is less than its average.

Well-diversified portfolios have negligible systematic risks. unsystematic risks. expected returns. variances. market risks.

unsystematic risks.

A stock with an actual return that lies above the security market line has less systematic risk than the overall market. more risk than warranted based on the realized rate of return. yielded a return equivalent to the level of risk assumed. more systematic risk than the overall market. yielded a higher return than expected for the level of risk assumed.

yielded a higher return than expected for the level of risk assumed.