midterm 2 second set

The normal distribution is completely described by its

mean and standard deviation

Investors require a risk premium as compensation for bearing

systematic risk

You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?

$6000

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of

-1

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

0.8

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 13%. What is the expected return on a stock with a beta of 1.4?

15.88%

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 _________.

19.76%

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?

9.2%

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Advisor A was better because he generated a larger alpha.

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

The Federal Reserve increases interest rates 50 basis points.

The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

Treasury bills; risky assets

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

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

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________.

overpriced

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

requires a risk premium to take on the risk

The market risk premium is defined as

the difference between the return on an index fund and the return on Treasury bills

The complete portfolio refers to the investment in

the risk-free asset and the risky portfolio combined

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

up; left