Investment Managment Final Ch. 6

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.

B. increase the unsystematic risk of the portfolio

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

B. less than 1

Rational risk-averse investors will always prefer portfolios _____________.

B. located on the capital market line to those located on the efficient frontier

Harry Markowitz is best known for his Nobel Prize-winning work on _____________.

B. techniques used to identify efficient portfolios of risky assets

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

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

B. up; left

The market value weighted-average beta of firms included in the market index will always be _____________.

C. 1

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

C. 1

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

A security's beta coefficient will be negative if ____________.

A. its returns are negatively correlated with market-index returns

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

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

The term complete portfolio refers to a portfolio consisting of _________________.

A. the risk-free asset combined with at least one risky asset

Risk that can be eliminated through diversification is called ______ risk.

A. unique B. firm-specific C. diversifiable D. all of these options D is correct

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

B. -.9

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.

B. I and II only

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

B. I and II 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

C. III and IV only

Which of the following provides the best example of a systematic-risk event?

C. The Federal Reserve increases interest rates 50 basis points.

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

C. calculate three covariances

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 ____________.

C. correlation coefficient between ACE and the market has risen

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

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

Beta is a measure of security responsiveness to _________.

C. market risk

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

C. optimal mix of the risk-free asset and risky asset

The expected rate of return of a portfolio of risky securities is _________.

C. the weighted sum of the securities' expected returns

Which of the following correlation coefficients will produce the least diversification benefit?

D. .8

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

D. I, II, and III

The correlation coefficient between two assets equals _________.

D. their covariance divided by the product of their standard deviations

Firm-specific risk is also called __________ and __________.

D. unique risk; diversifiable risk

The values of beta coefficients of securities are __________.

D. usually positive but are not restricted in any particular way