hw 4 - probs

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

all

Which of the following correlation coefficients will produce the most diversification benefits?

lowest

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.

2 & 3 only

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

III and IV only

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 ______.

asset a

Which one of the following stock return statistics fluctuates the most over time?

avg return

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.

calculate three covariances

The _________ reward-to-variability ratio is found on the ________ capital market line.

highest, steepest

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.

less than 1

Diversification is most effective when security returns are _________.

negatively correlated

An investor's degree of risk aversion will determine his or her ______.

optimal mix of the risk-free asset and risky asset

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

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

unique risk

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

up, left

Which of the following statistics cannot be negative?

variance