Chapter 7

3.Portfolio risk is a weighted average of the individual security risks

(F,

In the case of a four-security portfolio, there will be 8 covariances

(F,

A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.

(T,

A probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes

(T,

According to the Law of Large Numbers, the larger the sample size, the more likely it is that the sample mean will be close to the population expected value.

(T,

Gold offers additional diversification since gold's performance typically moves independent of other investments and even major economic indicators

(T,

If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model, the assumption is that past relationships will continue in the future.

(T,

Portfolio risk is affected by both the correlation between assets and by the percentage funds invested in each asset.

(T,

Standard deviations for well-diversified portfolios are reasonably steady over time

(T,

Throwing a dart at the WSJ and selecting stocks on this basis would be considered random diversification.

(T,

The range of the correlation coefficient is from

-1.0 + 1.0

Which of the following statements regarding portfolio risk and number of stocks is generally true?

Adding more stocks decreases risk but does not eliminate it.

9.Which of the following statements regarding expected return of a portfolio is true?

It can never be higher or lower than the weighted average expected return of individual assets

-is concerned with the interrelationships between security returns

Markowitz diversification

Security A and Security B have a correlation coefficient of 0. If Security A's return is expected to increase by 10 percent,

Security B's return is impossible to determine from the above information.

Which of the following is true regarding random diversification?

The benefits of random diversification do not continue as more securities are added.

Which of the following portfolios has the least reduction of risk?

a.A portfolio with securities all having positive correlation with each other

With a continuous probability distribution,:

an infinite number of possible outcomes exist.

Portfolio weights are found by

b.calculating the percentage each asset is to the total portfolio value.

The most familiar distribution is the normal distribution which is:

bell-shaped.

Which of the following is true regarding the expected return of a portfolio?

c.It can never be above the highest individual return.

Probability distributions:

c.can be either discrete or continuous

The major problem with the Markowitz model is its:

complexity

Markowitz's main contribution to portfolio theory is

d.insight about the relative importance of variances and covariances in determining portfolio risk.

Portfolio risk is best measured by the

d.standard deviation.

Which of the following statements regarding the correlation coefficient is not true?

determines the causes of the relationship between two securities returns.

Company specific risk is also known as:

idiosyncratic risk.

The relevant risk for a well-diversified portfolio is:

market risk.

A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in

only the risk level of the portfolio

Owning two securities instead of one will not reduce the risk taken by an investor if the two securities are

perfectly positively correlated with each other.

When the covariance is positive, the correlation will be

positive

In order to determine the expected return of a portfolio, all of the following must be known except

probabilities of expected returns of individual assets.

The one-period rate of return from a stock or bond which may or may not be realized can be described by using the term:

random variable

The major difference between the correlation coefficient and the covariance is that:

the correlation coefficient is a relative measure showing association between security returns and the covariance is an absolute measure showing association between security returns

When returns are perfectly positively correlated, the risk of the portfolio 1S:

the weighted average of the individual securities risk.

The expected value is the:

weighted average of all possible outcomes