6, Chapter 5, FIN 3826 - ch 5 test bank, Investment Management Final Ch. 5
You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____. A. 4% B. 3.5% C. 7% D. 11%
D. 11%
16. Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A. 2 B. 6 C. 8 D. 20
D. 20
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. .40 B. .50 C. .75 D. .80
A. .40 20%-10%/25%
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. .583 B. .225 C. .327 D. .128
A. .583 .0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ρ; ρ = .583
34. 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 .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________. A. 0% B. 40% C. 60% D. 100%
A. 0%
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 than are the returns of stock B. A. 20% more B. slightly more C. 20% less D. slightly less
A. 20% more
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. 9.7% B. 12.2% C. 14% D. 15.6%
A. 9.7%
2. The _______ decision should take precedence over the _____ decision. A. asset allocation; stock selection B. bond selection; mutual fund selection C. stock selection; asset allocation D. stock selection; mutual fund selection
A. Asset allocation; stock selection
Annual percentage rates can be converted to effective annual rates by means of the following formula: A. [1 + (APR/n)]n - 1 B. (APR)(n) C. (APR/n) D. (periodic rate)(n)
A. [1 + (APR/n)]n - 1
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. asset A B. asset B C. no risky asset D. The answer cannot be determined from the data given.
A. asset A
11. Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest? A. dollar-weighted return B. geometric average return C. arithmetic average return D. mean holding-period return
A. dollar-weighted return
54. A security's beta coefficient will be negative if ____________. A. its returns are negatively correlated with market-index returns B. its returns are positively correlated with market-index returns C. its stock price has historically been very stable D. market demand for the firm's shares is very low
A. its returns are negatively correlated with market-index returns
24. On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below
A. left and above
59. 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 ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index
A. stock's standard deviation
The market risk premium is defined as __________. A. the difference between the return on an index fund and the return on Treasury bills B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset
A. the difference between the return on an index fund and the return on Treasury bills
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. -.0447 B. -.0020 C. .0020 D. .0447
B. -.0020 Covariance = -.50(.10)(.04)
71. Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4
B. -.9
81. The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio? A. 0 B. .45 C. .74 D. 1.35
B. .45 Reward-to-variability ratio = (.089 - .035)/.12 = .45
52. A stock has a correlation with the market of .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. 1 B. .75 C. .60 D. .55
B. .75
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. A. 0% B. 10.8% C. 18% D. 24%
B. 10.8%
16. An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______. A. 41.68% B. 11.32% C. 3.64% D. 13%
B. 11.32%
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 correlation coefficient between the returns on A and B is 0%. The expected return on the minimum-variance portfolio is approximately _________. A. 10% B. 13.6% C. 15% D. 19.41%
B. 13.6%
38. 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 .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.) A. 14% B. 16% C. 18% D. 19%
B. 16%
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 .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. 23% B. 19.76% C. 18.45% D. 17.67%
B. 19.76% σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45) σ2p = .039046 σp = 19.76%
83. A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 25% C. 50% D. 75%
B. 25% E[rp] = (.5)(100) + (.5)(-50) = 25%
Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment? A. 3.01% B. 3.09% C. 12.42% D. 16.71%
B. 3.09%
36. 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 .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________. A. 0% B. 5% C. 7% D. 20%
B. 5%
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. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope
B. all fall on the line of best fit; negative slope
2. The ______ measure of returns ignores compounding. A. geometric average B. arithmetic average C. IRR D. dollar-weighted
B. arithmetic average
8. The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to-variability ratio
B. correlation coefficient
15. The risk that can be diversified away is __________. A. beta B. firm-specific risk C. market risk D. systematic risk
B. firm-specific risk
9. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen? A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return
B. geometric average return
Published data on past returns earned by mutual funds are required to be ______. A. dollar-weighted returns B. geometric returns C. excess returns D. index returns
B. geometric returns
26. Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum-variance point on the efficient frontier D. that are risk-free to all other asset choices
B. located on the capital market line to those located on the efficient frontier
12. Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated
B. negatively correlated
43. A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. alpha
B. standard deviation
75. A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________. A. firm-specific risk B. systematic risk C. unique risk D. none of the options
B. systematic risk
6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up; right B. up; left C. down; right D. down; left
B. up; left
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. .12 B. .36 C. .60 D. .77
C. .60
55. The market value weighted-average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. none of these options (There is no particular rule concerning the average beta of firms included in the market index.)
C. 1
72. What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A. -1 B. 0 C. 1 D. .5
C. 1
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 returns on A and B is 0%. The standard deviation of return on the minimum-variance portfolio is _________. A. 0% B. 6% C. 12% D. 17%
C. 12%
Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment? A. 2.04% B. 12 % C. 12.24% D. 12.89%
C. 12.24%
Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment? A. 6.38% B. 12.77% C. 13.17% D. 14.25%
C. 13.17%
39. 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 .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________. A. 25.5% B. 22.3% C. 21.4% D. 20.7%
C. 21.4%
62. You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______. A. 1.8 B. 2.48 C. 3.12 D. 5.49
C. 3.12 The Sharpe ration grows at a rate of so the 3-year Sharpe ration would be 1.8 × = 3.12.
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. 10% B. 20% C. 40% D. 60%
C. 40%
57. To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1 B. .5 C. 0 D. -1
D. -1
You have an APR of 7.5% with continuous compounding. The EAR is _____. A. 7.5% B. 7.65% C. 7.79 % D. 8.25%
C. 7.79 %
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 that 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. 7% B. 8.5% C. 8.8% D. 9.25%
C. 8.8% 6% + (1.5%)(1.2) + 1% = 8.8%
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 returns on A and B is .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. 45% B. 67% C. 85% D. 92%
C. 85%
The geometric average of -12%, 20%, and 25% is _________. A. 8.42% B. 11% C. 9.7% D. 18.88%
C. 9.7%
Rank the following from highest average historical return to lowest average historical return from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV
C. I, III, II, IV
Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2013. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills A. I, II, III, IV B. III, IV, II, I C. I, III, II, IV D. III, I, II, IV
C. I, III, II, IV
7. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________. A. dollar-weighted return B. geometric average return C. arithmetic average return D. index return
C. arithmetic average return
20. Which one of the following stock return statistics fluctuates the most over time? A. Covariance of returns B. Variance of returns C. Average return D. Correlation coefficient
C. average return
69. If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks
C. calculate free coverlances
51. You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. A. covariance between ACE and the market has fallen B. correlation coefficient between ACE and the market has fallen C. correlation coefficient between ACE and the market has risen D. unsystematic risk of ACE has risen
C. correlation coefficient between ACE and the market has risen
3. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________. A. geometric average return B. arithmetic average return C. dollar-weighted return D. index return
C. dollar-weighted return
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. equal to the sum of the securities' standard deviations B. equal to -1 C. equal to 0 D. greater than 0
C. equal to 0
28. The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; steepest B. highest; flattest C. highest; steepest D. lowest; flattest
C. highest; steepest
14. Beta is a measure of security responsiveness to _________. A. firm-specific risk B. diversifiable risk C. market risk D. unique risk
C. market risk
60. Which of the following provides the best example of a systematic-risk event? A. A strike by union workers hurts a firm's quarterly earnings. B. Mad Cow disease in Montana hurts local ranchers and buyers of beef. C. The Federal Reserve increases interest rates 50 basis points. D. A senior executive at a firm embezzles $10 million and escapes to South America.
C. the Federal Reserve increases internet rates 50 basis points
8. The complete portfolio refers to the investment in _________. A. the risk-free asset B. the risky portfolio C. the risk-free asset and the risky portfolio combined D. the risky portfolio and the index
C. the risk-free asset and the risky portfolio combined
37. 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 .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________. A. 29% B. 44% C. 56% D. 71%
D. 71%
82. A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 62% D. 73%
D. 73% E[rp] = (.60)(1) + (.40)(-.5) = .40 σ2rp = (.60)(1 - .40)2 + (.40)(-.5 - .40)2 = .54 σrp = .73
1. Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options
D. All of these options
The dollar-weighted return is the _________. A. difference between cash inflows and cash outflows B. arithmetic average return C. geometric average return D. internal rate of return
D. internal rate of return
11. The correlation coefficient between two assets equals _________. A. their covariance divided by the product of their variances B. the product of their variances divided by their covariance C. the sum of their expected returns divided by their covariance D. their covariance divided by the product of their standard deviations
D. their covariance divided by the product of their standard deviations
4. Which one of the following measures time-weighted returns and allows for compounding? A. geometric average return B. arithmetic average return C. dollar-weighted return D. historical average return
A. geometric average return
25. The term complete portfolio refers to a portfolio consisting of _________________. A. the risk-free asset combined with at least one risky asset B. the market portfolio combined with the minimum-variance portfolio C. securities from domestic markets combined with securities from foreign markets D. common stocks combined with bonds
A. the risk-free asset combined with at least one risky asset
The arithmetic average of -11%, 15%, and 20% is ________. A. 15.67% B. 8% C. 11.22% D. 6.45%
B. 8%
You have an EAR of 9%. The equivalent APR with continuous compounding is _____. A. 8.47% B. 8.62% C. 8.88% D. 9.42%
B. 8.62%
58. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0
B. less than 1
18. Market risk is also called __________ and _________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk
B. systematic risk; nondiversifiable risk
21. Harry Markowitz is best known for his Nobel Prize-winning work on _____________. A. strategies for active securities trading B. techniques used to identify efficient portfolios of risky assets C. techniques used to measure the systematic risk of securities D. techniques used in valuing securities options
B. techniques used to identify efficient portfolios of risky assets
The holding period return on a stock is equal to _________. A. the capital gain yield over the period plus the inflation rate B. the capital gain yield over the period plus the dividend yield C. the current yield plus the dividend yield D. the dividend yield plus the risk premium
B. the capital gain yield over the period plus the dividend yield
50. The term excess return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested
B. the difference between the rate of return earned and the risk-free rate
22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to vary independently of each other C. the returns on the stock and bond portfolios tend to move together D. the covariance of the stock and bond portfolios will be positive
B. the returns on the stock and bond portfolios tend to vary independently of each other
9. Which of the following statistics cannot be negative? A. Covariance B. Variance C. E(r) D. Correlation coefficient
B. variance
61. Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II, and III
C. II and III only
27. The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier 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 A. I and II only B. II and III only C. III and IV only D. I and IV only
C. III and IV only
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 trade-offs 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 the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate
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
56. Diversification can reduce or eliminate __________ risk. A. all B. systematic C. nonsystematic D. only an insignificant
C. nonsystematic
70. Which of the following correlation coefficients will produce the least diversification benefit? A. -.6 B. -.3 C. 0 D. .8
D. .8
47. Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk A. I only B. I and II only C. I, II, and III D. I and III
D. I and III
77. You are considering adding a new security to your portfolio. 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. I only B. I and II only C. I and III only D. I, II, and III
D. I, II, and III
74. Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. Market risk B. Unique risk C. Unsystematic risk D. None of these options (With a correlation of 1, no risk will be reduced.)
D. None of these options (with a correlation of 1, no risk will be reduced)
73. Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. Market risk B. Nondiversifiable risk C. Systematic risk D. Unique risk
D. unique risk
19. Firm-specific risk is also called __________ and __________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk
D. unique risk; diversifiable risk
53. The values of beta coefficients of securities are __________. A. always positive B. always negative C. always between positive 1 and negative 1 D. usually positive but are not restricted in any particular way
D. usually positive but are not restricted in any particular way
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. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 - W22σ22) D. σ2rp > (W12σ12 + W22σ22)
D. σ2rp > (W12σ12 + W22σ22)
35. 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 .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is _________. A. 14% B. 15.6% C. 16.4% D. 18%
A. 14%
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. I only B. I and II only C. II and III only D. I, II, and III
B. I and II only
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. I only B. I and II only C. III only D. I, II, and III
B. I and II only
68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year
B. increase the unsystematic risk of the portfolio
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 your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________. A. more than 18% but less than 24% B. equal to 18% C. more than 12% but less than 18% D. equal to 12%
C. more than 12% but less than 18% σ2p = .02592 = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12).55 = .02592; σ = 16.1%
7. An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of the risk-free asset and risky asset D. capital allocation line
C. optimal mix of the risk-free asset and risky asset
13. The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities' covariances B. the sum of the securities' variances C. the weighted sum of the securities' expected returns D. the weighted sum of the securities' variances
C. the weighted sum of the securities' expected returns
3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________. A. they had to pay huge fines for obstruction of justice B. their 401k accounts were held outside the company C. their 401k accounts were not well diversified D. none of these options
C. their 401k accounts were not well diversified
