Investment HW 4

A correlation of _____ indicates that one asset's return varies perfectly inversely with the other's; a correlation of _____ indicates perfect positive correlation; a correlation of _____ indicated that the returns on the two assets are unrelated.

-1 +1 0

Which of the following are true?

A The covariance is the square root of the correlation coefficient. B Similar to the standard deviation, the covariance and correlation can only be a positive value. C The correlation coefficient is a scaled value and easier to interpret than the covariance. D The correlation coefficient is the covariance of two assets divided by the product of the standard deviations of those assets.

The _____ rate of return on a portfolio is the _____ average of expected returns on the _____ securities.

Correct Answer Blank 1: expected Blank 2: weighted Blank 3: component or risky

One benefit of diversification is a portfolio with a _____ standard deviation than individual securities.

Correct Answer Blank 1: lower

One benefit of diversification is a portfolio with a _____standard deviation than individual securities.

Correct Answer Blank 1: lower

The risk of a portfolio can be described as the _____ deviation of returns during the same series.

Correct Answer Blank 1: standard

Under what circumstances are there no benefits from diversification? When the correlation coefficient between two assets' returns is -1 When the correlation coefficient between two assets' returns is less than perfectly correlated When the correlation coefficient between two assets' returns is zero When the correlation coefficient between two assets' returns is +1

Correct Answer When the correlation coefficient between two assets' returns is +1

The optimal risky portfolio is risk-free assets the collection of stocks with the highest expected returns the best combination of risky assets the collection of stocks with the lowest risk

Correct Answer the best combination of risky assets

Which of the following are true? Similar to the standard deviation, the covariance and correlation can only be a positive value. The covariance is the square root of the correlation coefficient. The correlation coefficient is a scaled value and easier to interpret than the covariance. The correlation coefficient is the covariance of two assets divided by the product of the standard deviations of those assets.

Correct Answer: The correlation coefficient is a scaled value and easier to interpret than the covariance. The correlation coefficient is the covariance of two assets divided by the product of the standard deviations of those assets.

The sloe of the CAL is total return divided by variance. excess return divided by variance. excess return divided by standard deviation. total return divided by standard deviation.

Correct Answer: excess return divided by standard deviation.

The optimal risky portfolio _______. includes t-bills as one of its asset classes has the greatest Sharpe Ratio of any of the portfolio options is also called the tangent portfolio

Correct Answer: has the greatest Sharpe Ratio of any of the portfolio options is also called the tangent portfolio

True or false: A complete portfolio is a risky portfolio consisting of stocks and risky bonds.

False

The standard deviation of a portfolio of assets will be_______ (less/greater) than a single asset, if the assets in the portfolio have a________ (high/low) correlation coefficient.

Less Low

What must be true of the correlation for there to be no benefit gained from diversification? Inverse Correlation Perfect Positive Correlation Zero Correlation Perfect Negative Correlation

Perfect Positive Correlation

The standard deviation of a portfolio is equal to the weighted average standard deviations of its assets only when the assets are perfectly _______ correlated. negatively semi un positively

Positively

When forming a complete portfolio, a rational investor chooses a mix of a safe asset and a risky portfolio in order to maximize expected _____ for a given level of _____

Return Risk

The risk of a portfolio can be described as the _____ deviation of returns during the same series.

Standard

Which of the following are true of the Sharpe Ratio? The Sharpe Ratio is a measure of total return divided by the probability of downside risk. The Sharpe Ratio is the slope of the Capital Allocation Line for a rational, risk-averse investor. The Sharpe Ratio is a measure of return beyond the risk-free return scaled by the risk taken to generate that return.

The Sharpe Ratio is the slope of the Capital Allocation Line for a rational, risk-averse investor. The Sharpe Ratio is a measure of return beyond the risk-free return scaled by the risk taken to generate that return.

True Or FAlse: Portfolio A will dominate portfolio B if portfolio A has higher mean return and lower variance or standard deviation.

True

True or false: The benefit of diversification implies that it is possible to find two assets and choose the investment proportions that will result in a portfolio with standard deviation lower than individual standard deviations of either of the assets.

True

True or false: The benefit of diversification implies that it is possible to find two assets and choose the investment proportions that will result in a portfolio with standard deviation lower than individual standard deviations of either of the assets.

True

Under what circumstances are there no benefits from diversification? When the correlation coefficient between two assets' returns is +1 When the correlation coefficient between two assets' returns is zero When the correlation coefficient between two assets' returns is less than perfectly correlated When the correlation coefficient between two assets' returns is -1

When the correlation coefficient between two assets' returns is +1

The Insurance Principle relies on the idea that firm-specific risk among different shares of stock is

codependent interdependent independent dependent Correct Answer independent

The portfolio variance is lower when the correlation coefficients of its component securities are _____.

greater than one equal to one less than one Correct Answer less than one

The Insurance Principle states that ______.

overall risk can be increased if it is derived from multiple sources overall risk is the sum of the risk derived from individual sources overall risk can be reduced if it is derived from many different sources overall risk can be reduced if it is derived from a single source Correct Answer overall risk can be reduced if it is derived from many different sources

The standard deviation of a portfolio is equal to the weighted average standard deviations of its assets only when the assets are perfectly _______ correlated. negatively positively un semi

positively

If security A's expected return increases while security B's price increases, then these assets vary in

tandem opposition no discernible way Correct Answer: opposition