Ch 6 finance

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 B) asset B C) no risky asset D) can't tell from the data given

A) asset A

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. A. .583 B. .225 C. .327 D. .128 ############?????????

A. .583

11. Asset A has an expected return of 15% and a reward-to-variability ratio of .5. Asset B has an expected return of 20% and a reward-to-variability ratio of .4. A risk-averse investor would prefer a portfolio using the risk-free asset and _______. A. asset A B. asset B C. no risky asset D. can't tell from the data given

A. asset A

1. Which one of the following correlation is best for diversification? A) 1 B) -1 C) 0 D) -2

Answer B (correlation can't be -2)

Following the last problem, if the stock and bond portfolios have a correlation of .55. how much is the portfolio's standard deviation? A. 15% B. 15.81% C. 14% D. None of the above **don;'t use percents for stnd dev***

B. 15.81%

which one of the following is correct? A. Diversification is most effective when security returns are not correlated. B. The expected rate of return of a portfolio of risky securities is the weighted average of the securities' expected returns. C. The standard deviation of a portfolio of risky securities is the weighted average of the securities' standard deviation. D. Firm-specific risk is also called nondiversifiable risk.

B. The expected rate of return of a portfolio of risky securities is the weighted average of the securities' expected returns.

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 25%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 10%. If the correlation between the two is 1, the standard deviation of the resulting portfolio will be A. more than 14% but less than 25% B. equal to 17.5% C. more than 25% D. equal to 10%

B. equal to 17.5%

1. Which one of the following statement is NOT correct? A) Minimum Variance portfolio has the lowest risk among all portfolios along the investment opportunity set. B) Single index model assume the security co-moves with one single factor. C) Given different level of risk aversion and hold everything else the same, given the investment opportunity set of risky portfolios, investors should invest in a portfolio that he/she deems appropriate for his risk tolerance level. D) Investor should not invest in any portfolio that lies below the Minimum Variance portfolio. E) None of the above

C) Given different level of risk aversion and hold everything else the same, given the investment opportunity set of risky portfolios, investors should invest in a portfolio that he/she deems appropriate for his risk tolerance level.

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________. A. .12 B. .36 C. .60 D. .77

C. .60

Which one of the following is NOT true? A. Risk that can be eliminated through diversification is called firm-specific risk B. The lower the correlation among assets, the lower the risk to a portfolio. C. As we randomly add assets to a portfolio (or increase the number of assets in the portfolio), portfolios risk increases. D. A correlation of -1 between two assets will reduce or eliminate their portfolio's risk.

C. As we randomly add assets to a portfolio (or increase the number of assets in the portfolio), portfolios risk increases.

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 A. I and II only B. II and III only C. III and IV only D. I and IV only

C. III and IV only

Following the last problem, if the correlation is less than 1, regarding the portfolio's standard deviation which one of the following statement is most correct? A. higher than 17.5% B. lower than 10% C. between 10% and 17.5% D. between 10% and 25%

C. between 10% and 17.5%

An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of the risk-free asset and risky asset D. capital allocation line

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

1. The market portfolio has a beta of __________. A) -1.0 B) 0 C) 0.5 D) 1.0

D) 1.0

1. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk? A) Market risk B) Unique risk C) Unsystematic risk D) None of the above

D) None of the above

1. The security characteristic line is ________________. A) the trend line representing the security's tendency to advance or decline in the market over some period of time B) the "best fit" line representing the regression of the market's excess returns on the security excess returns over some period of time C) another term for the capital allocation line representing the set of complete portfolios that can be constructed by combining the security with T-bill holdings D) None of the above answers is correct

D) None of the above answers is correct

1. The systematic risk of a security __________. A) is likely to be higher in a rising market B) results from its own unique factors C) depends upon market volatility D) cannot be diversified away

D) cannot be diversified away

1. In a well diversified portfolio, __________ risk is negligible. A) non-diversifiable B) market C) systematic D) unsystematic

D) unsystematic

Which one of the following statement is correct A. Minimum Variance portfolio has the best return risk ratio among all portfolios along the investment opportunity set. B. Given different level of risk aversion and hold everything else the same, given the investment opportunity set of risky portfolios, investors should invest in a portfolio that he/she deems appropriate for his risk tolerance level. C. Investor should consider investing in portfolios that lies below the Minimum Variance portfolio. D. Single index model assume the security co-moves with only one single factor, usually the market index. Stocks do not correlate with each other. E. With n assets to form portfolios, the efficient frontier dominate the other portfolios, we can invest in any portfolio on the efficient frontier.

D. Single index model assume the security co-moves with only one single factor, usually the market index. Stocks do not correlate with each other.

1. Risk that can be eliminated through diversification is called ______ risk. A. unsystematic B. firm-specific C. diversifiable D. all of the above

D. all of the above

1. The optimal risky portfolio can be identified by finding _____________. A) the minimum variance point on the efficient frontier B) the maximum return point on the efficient frontier C) the tangency point of the capital market line and the efficient frontier D) the line with the steepest slope that connects the risk free rate to the efficient frontier E) C and D

E) C and D

1. Which one of the following statement is NOT correct? A) A security's beta coefficient will be negative if its returns are negatively correlated with market index returns. B) Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is less than 1 C) The term excess-return refers to the difference between the rate of return on a risky asset and the risk-free rate D) You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's expected return, risk and correlation with your portfolio. E) If a risky portfolio consists of the a bond and a stock, then investors with higher degree of risk aversion should invest more in the bond.

E) If a risky portfolio consists of the a bond and a stock, then investors with higher degree of risk aversion should invest more in the bond.