Multiple Choice Questions for Investments quiz
According to the capital asset pricing model, a security with a _________.
positive alpha is considered underpriced
The term complete portfolio refers to a portfolio consisting of _________________.
the risk-free asset combined with at least one risky asset
The expected rate of return of a portfolio of risky securities is
the weighted sum of the securities' expected returns
. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ___.
their 401k accounts were not well diversified
The correlation coefficient between two assets equals _________.
their covariance divided by the product of their standard deviations
Standard deviation of portfolio returns is a measure of ___________.
total risk
Risk that can be eliminated through diversification is called ______ risk
unique firm-specific diversifiable
In a well-diversified portfolio, __________ risk is negligible
unsystematic
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.
up; left
According to the capital asset pricing model, fairly priced securities have _________.
zero alphas
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?
σ2rp > (W12σ12 + W22σ22)
Asset A has an expected return of 15% and a Sharpe ratio of .4. Asset B has an expected return of 20% and a Sharpe ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and
Asset A. This is because the higher the value of sharpe ratio, the greater is the ability of the stock to provide a good risk adjusted return.
Diversification is most effective when security returns are
negatively correlated
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______
B. the returns on the stock and bond portfolios tend to vary independently of each other
The optimal risky portfolio can be identified by finding
III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier
The graph of the relationship between expected return and beta in the CAPM context is called the _________.
SML
Which statistics cannot be negative?
Variance
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 ______________.
all fall on the line of best fit; negative slope
. According to the capital asset pricing model, a fairly priced security will plot _________.
along the security market line
The _______ decision should take precedence over the _____ decision
asset allocation, stock selection
Arbitrage is based on the idea that _________.
assets with identical risks must have the same expected rate of return
In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.
beta
An adjusted beta will be ______ than the unadjusted beta
closer to 1
The ________ is equal to the square root of the systematic variance divided by the total variance.
correlation coefficient
Building a zero-investment portfolio will always involve _____________.
equal investments in a short and a long position
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 _________
equal to 0
An investor's degree of risk aversion will determine his or her ______.
optimal mix of the risk-free asset and risky asset
If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________.
expected returns to fall; risk premiums to fall
The _________ reward-to-variability ratio is found on the ________ capital market line.
highest; steepest
According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.
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
Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.
increase the unsystematic risk of the portfolio
Beta is a measure of security responsiveness to _________
market risk
A measure of the riskiness of an asset held in isolation is ____________.
standard deviation
If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.
stock's standard deviation
According to CAPM, investors require a risk premium as compensation for bearing ______________.
systematic risk
An important characteristic of market equilibrium is _______________.
the absence of arbitrage opportunities
The beta of a security is equal to _________.
the covariance between the security and market returns divided by the variance of the market's returns