Multiple Choice Questions for Investments quiz

According to the capital asset pricing model, a security with a _________.

positive alpha is considered underpriced

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

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

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

the weighted sum of the securities' expected returns

. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ___.

their 401k accounts were not well diversified

The correlation coefficient between two assets equals _________.

their covariance divided by the product of their standard deviations

Standard deviation of portfolio returns is a measure of ___________.

total risk

Risk that can be eliminated through diversification is called ______ risk

unique firm-specific diversifiable

In a well-diversified portfolio, __________ risk is negligible

unsystematic

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

up; left

According to the capital asset pricing model, fairly priced securities have _________.

zero alphas

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?

σ2rp > (W12σ12 + W22σ22)

Asset A has an expected return of 15% and a Sharpe ratio of .4. Asset B has an expected return of 20% and a Sharpe ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and

Asset A. This is because the higher the value of sharpe ratio, the greater is the ability of the stock to provide a good risk adjusted return.

Diversification is most effective when security returns are

negatively correlated

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

The optimal risky portfolio can be identified by finding

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

The graph of the relationship between expected return and beta in the CAPM context is called the _________.

SML

Which statistics cannot be negative?

Variance

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 ______________.

all fall on the line of best fit; negative slope

. According to the capital asset pricing model, a fairly priced security will plot _________.

along the security market line

The _______ decision should take precedence over the _____ decision

asset allocation, stock selection

Arbitrage is based on the idea that _________.

assets with identical risks must have the same expected rate of return

In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.

beta

An adjusted beta will be ______ than the unadjusted beta

closer to 1

The ________ is equal to the square root of the systematic variance divided by the total variance.

correlation coefficient

Building a zero-investment portfolio will always involve _____________.

equal investments in a short and a long position

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 _________

equal to 0

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

optimal mix of the risk-free asset and risky asset

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

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

highest; steepest

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

Beta is a measure of security responsiveness to _________

market risk

A measure of the riskiness of an asset held in isolation is ____________.

standard deviation

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

According to CAPM, investors require a risk premium as compensation for bearing ______________.

systematic risk

An important characteristic of market equilibrium is _______________.

the absence of arbitrage opportunities

The beta of a security is equal to _________.

the covariance between the security and market returns divided by the variance of the market's returns