Fin 300 UIUC
You short-sell 200 shares of Tuckerton Trading Company, now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost? $50 $150 $10,000 Unlimited
$10,000
The market value weighted-average beta of all firms included in the market index will always be __________. 0 between 0 and 1 1 none of these options (There is no particular rule concerning the average beta of firms included in the market index.)
1
An example of a real asset is: 1. A college education 2. Customer goodwill 3. A patent 1 only 2 only 1 and 3 only 1 2 and 3
1 2 and 3
Even if the markets are efficient, professional portfolio management is still important because it provides investors with: 1. Low-cost diversification 2. A portfolio with a specified risk level 3. Better risk-adjusted returns than an index 1 only 1 and 2 only 2 and 3 only 1, 2, and 3
1 and 2 only
Which risk can be partially or fully diversified away as additional securities are added to a portfolio? 1. Total risk 2. Systematic risk 3. Firm-specific risk 1 only 1 and 2 only 1, 2, and 3 1 and 3
1 and 3
You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? 1. Your nominal return on the T-bills is riskless. 2. Your real return on the T-bills is riskless. 3. Your nominal Sharpe ratio is zero. 1 only 1 and 3 only 2 only 1, 2, and 3
1 and 3 only
Debt securities promise: 1. A fixed stream of income. 2. A stream of income that is determined according to a specific formula. 3. A share in the profits of the issuing entity. 1 only 1 or 2 only 1 and 3 only 2 or 3 only
1 or 2 only
In a simple CAPM world which of the following statements is (are) correct? 1. All investors will choose to hold the market portfolio, which includes all risky assets in the world. 2. Investors' complete portfolio will vary depending on their risk aversion. 3. The return per unit of risk will be identical for all individual assets. 4. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. 1, 2, and 3 only 2, 3, and 4 only 1, 3, and 4 only 1, 2, 3, and 4
1, 2, 3, and 4
Active trading in markets and competition among securities analysts helps ensure that: 1. Security prices approach informational efficiency. 2. Riskier securities are priced to offer higher potential returns. 3. Investors are unlikely to be able to consistently find under- or overvalued securities. 1 only 1 and 2 only 2 and 3 only 1, 2, and 3
1, 2, and 3
Among the important characteristics of market efficiency is (are) that: 1. There are no arbitrage opportunities. 2. Security prices react quickly to new information. 3. Active trading strategies will not consistently outperform passive strategies. 1 only 2 only 1 and 3 only 1, 2, and 3
1, 2, and 3
Money market securities are characterized by: 1. Maturity less than 1 year 2. Safety of the principal investment 3. Low rates of return 1 only 1 and 2 only 1 and 3 only 1, 2, and 3
1, 2, and 3
Which of the following are financial assets? 1. Debt securities 2. Equity securities 3. Derivative securities 1 only 1 and 2 only 2 and 3 only 1, 2, and 3
1, 2, and 3
Which of the following are assumptions of the simple CAPM model? 1. Individual trades of investors do not affect a stock's price. 2. All investors plan for one identical holding period. 3. All investors analyze securities in the same way and share the same economic view of the world. 4. All investors have the same level of risk aversion. 1, 2, and 4 only 1, 2, and 3 only 2, 3, and 4 only 1, 2, 3, and 4
1, 2, and 3 only
The market portfolio has a beta of __________. −1.0 0.0 0.5 1.0
1.0
The optimal risky portfolio can be identified by finding: 1. The minimum-variance point on the efficient frontier 2. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier 3. The tangency point of the capital market line and the efficient frontier 4. The line with the steepest slope that connects the risk-free rate to the efficient frontier 1 and 2 only 2 and 3 only 3 and 4 only 1 and 4 only
3 and 4 only
_______ is not a derivative security. A share of common stock A call option A futures contract A put option
A share of common stock
The CAPM __________. predicts the relationship between risk and expected return of an asset provides a benchmark rate of return for evaluating possible investments helps us make an educated guess as to expected return on assets that have not yet traded in the marketplace All of the options are correct.
All of the options are correct.
Risk that can be eliminated through diversification is called __________ risk. unique firm-specific diversifiable All of these options are correct.
All of these options are correct.
Financial markets allow for all but which one of the following? Shift consumption through time from higher-income periods to lower. Price securities according to their riskiness. Channel funds from lenders of funds to borrowers of funds. Allow most participants to routinely earn high returns with low risk.
Allow most participants to routinely earn high returns with low risk.
An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process? Asset allocation Investment analysis Portfolio analysis Security selection
Asset allocation
_______ portfolio construction starts with selecting attractively priced securities. Bottom-up Top-down Upside-down Side-to-side
Bottom-up
The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the __________. SML CAPM CML total return line
CML
Real assets in the economy include all but which one of the following? Land Buildings Consumer durables Common Stock
Common Stock
_______ represents an ownership share in a corporation. Multiple Choice A call option Common stock A fixed-income security Preferred stock
Common stock
In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager? Accounting for results Diversification Identifying undervalued stocks No need for a portfolio manager
Diversification
According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits? Diversifying Investing in treasury bills Investing in stocks of utility companies Engaging in active portfolio management to enhance returns
Engaging in active portfolio management to enhance returns
Which one of the following measures time-weighted returns and allows for compounding? Geometric average return Arithmetic average return Dollar-weighted return Historical average return
Geometric average return
Which of the following statements is (are) correct? If a market is weak-form efficient, it is also semistrong- and strong-form efficient. If a market is semistrong-form efficient, it is also strong-form efficient. If a market is strong-form efficient, it is also semistrong- but not weak-form efficient. If a market is strong-form efficient, it is also semistrong- and weak-form efficient.
If a market is strong-form efficient, it is also semistrong- and weak-form efficient.
_______ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis. Active Momentum Passive Market-timing
Passive
Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach? Active management Arbitrage Fundamental analysis Passive investment
Passive investment
_______ is (are) real assets. Multiple Choice Bonds Production equipment Stocks Life insurance
Production equipment
_______ assets generate net income to the economy, and _______ assets define allocation of income among investors. Financial; financial Financial; real Real; financial Real; real
Real; financial
The graph of the relationship between expected return and beta in the CAPM context is called the __________. CML CAL SML SCL
SML
An investor should do which of the following for stocks with negative alphas? Go long Sell short Hold Do nothing
Sell short
The formula E(rP) − rf / σP is used to calculate the __________. Sharpe ratio Treynor measure coefficient of variation real rate of return
Sharpe ratio
Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency? Weak-form efficiency Semistrong-form efficiency Strong-form efficiency Technical analysis
Strong-form efficiency
Which of the following provides the best example of a systematic-risk event? A strike by union workers hurts a firm's quarterly earnings. Mad Cow disease in Montana hurts local ranchers and buyers of beef. The Federal Reserve increases interest rates 50 basis points. A senior executive at a firm embezzles $10 million and escapes to South America.
The Federal Reserve increases interest rates 50 basis points.
_______ portfolio construction starts with asset allocation. Bottom-up Top-down Upside-down Side-to-side
Top-down
Which one of the following best describes the purpose of derivatives markets? Multiple Choice Transferring risk from one party to another. Investing for a short time period to earn a small rate of return. Investing for retirement Earning interest income
Transferring risk from one party to another.
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. risky assets; Treasury bills Treasury bills; risky assets excess returns; risky assets index assets; bonds
Treasury bills; risky assets
You short-sell 200 shares of Tuckerton Trading Company, now selling for $50 per share. What is your maximum possible loss? $50 $150 $10,000 Unlimited
Unlimited
Which of the following statistics cannot be negative? Covariance Variance E(r) Correlation coefficient
Variance
Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? Market risk Unique risk Unsystematic risk With a correlation of 1, no risk will be reduced.
With a correlation of 1, no risk will be reduced.
Which of the following stock price observations would appear to contradict the weak-form of the efficient market hypothesis? The average rate of return is significantly greater than zero. The correlation between the market return one week and the return the following week is zero. You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.
You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
An example of a derivative security is _______. a common share of General Motors a call option on Intel stock a Ford bond a U.S. Treasury bond
a call option on Intel stock
Proponents of the EMH typically advocate __________. a conservative investment strategy a liberal investment strategy a passive investment strategy an aggressive investment strategy
a passive investment strategy
In a perfectly efficient market the best investment strategy is probably _______. an active strategy a passive strategy asset allocation market timing
a passive strategy
The strong form of the EMH states that __________ must be reflected in the current stock price. all security price and volume data all publicly available information all information, including inside information all costless information
all information, including inside information
The weak-form of the EMH states that __________ must be reflected in the current stock price. all past information, including security price and volume data all publicly available information all information, including inside information all costless information
all past information, including security price and volume data
The semistrong-form of the EMH states that __________ must be reflected in the current stock price. all security price and volume data all publicly available information all information, including inside information all costless information
all publicly available information
According to the capital asset pricing model, in equilibrium __________. all securities' returns must lie below the capital market line all securities' returns must lie on the security market line the slope of the security market line must be less than the market risk premium any security with a beta of 1 must have an excess return of zero
all securities' returns must lie on the security market line
The __________ measure of returns ignores compounding. geometric average arithmetic average IRR dollar-weighted
arithmetic average
You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the __________. dollar-weighted return geometric average return arithmetic average return index return
arithmetic average return
After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _______. asset allocation security analysis top-down portfolio management passive management
asset allocation
The __________ decision should take precedence over the __________ decision. asset allocation; security selection bond selection; mutual fund selection stock selection; asset allocation stock selection; mutual fund selection
asset allocation; security selection
Real assets are _______. assets used to produce goods and services always the same as financial assets always equal to liabilities claims on a company's income
assets used to produce goods and services
Arbitrage is based on the idea that __________. assets with identical risks must have the same expected rate of return securities with similar risk should sell at different prices the expected returns from equally risky assets are different markets are perfectly efficient
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 best captured by __________. unique risk beta the standard deviation of returns the variance of returns
beta
The measure of risk used in the capital asset pricing model is __________. specific risk the standard deviation of returns reinvestment risk beta
beta
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of 0.8 to offer a rate of return of 12%, then you should __________. buy stock X because it is overpriced buy stock X because it is underpriced sell short stock X because it is overpriced sell short stock X because it is underpriced
buy stock X because it is underpriced E(rx) would normally be 0.04+0.8×(0.11−0.04)=0.096<0.12→underpricedE(rx)
If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to __________. calculate two covariances and one trivariance calculate only two covariances calculate three covariances average the variances of the individual stocks
calculate three covariances
A _______ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date. call option futures contract put option interest rate swap
call option
In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the __________. capital allocation line indifference curve investor's utility line security market line
capital allocation line
Security selection refers to the _______. Multiple Choice allocation of the investment portfolio across broad asset classes analysis of the broad asset classes choice of specific securities within each asset class top-down method of investing
choice of specific securities within each asset class
Security selection refers to _______. choosing specific securities within each asset class deciding how much to invest in each asset class deciding how much to invest in the market portfolio versus the riskless asset deciding how much to hedge
choosing specific securities within each asset class
The _________ is the covariance divided by the product of the standard deviations of the returns on each fund. covariance correlation coefficient standard deviation reward-to-variability ratio
correlation coefficient
The value of a derivative security _______. depends on the value of another related security affects the value of a related security is unrelated to the value of a related security can be integrated only by calculus professors
depends on the value of another related security
According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is __________. directly related to the risk aversion of the particular investor inversely related to the risk aversion of the particular investor directly related to the beta of the stock inversely related to the alpha of the stock
directly related to the beta of the stock
If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________ geometric average return arithmetic average return dollar-weighted return index return
dollar-weighted return
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 the sum of the securities' standard deviations equal to −1 equal to 0 greater than 0
equal to 0
The expected return on the market is the risk-free rate plus the __________. diversified returns equilibrium risk premium historical market return unsystematic return
equilibrium risk premium
In a market economy, capital resources are primarily allocated by _______. governments corporation CEOs financial markets investment bankers
financial markets
The risk that can be diversified away is __________. beta firm-specific risk market risk systematic risk
firm-specific risk
The portfolio with the lowest standard deviation for any risk premium is called the __________. CAL portfolio efficient frontier portfolio global minimum variance portfolio optimal risky portfolio
global minimum variance portfolio
In securities markets, there should be a risk-return trade-off with higher-risk assets having _______ expected returns than lower-risk assets. higher lower the same The answer cannot be determined from the information
higher
A stock has a beta of 1.3. The systematic risk of this stock is __________ the stock market as a whole. higher than lower than equal to indeterminable compared to
higher than
The __________ reward-to-variability ratio is found on the __________ capital market line. lowest; steepest highest; flattest highest; steepest lowest; flattest
highest; steepest
When all investors analyze securities in the same way and share the same economic view of the world, we say they have __________. heterogeneous expectations equal risk aversion asymmetric information homogeneous expectations
homogeneous expectations
According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile 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 choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate
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 systematic risk of the portfolio increase the unsystematic risk of the portfolio increase the return of the portfolio decrease the variation in returns the investor faces in any one year
increase the unsystematic risk of the portfolio
A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called an __________ fund. stock index hedge money market
index
Stock prices that are stable over time __________. indicate that prices are useful indicators of true economic value indicate that the market has not incorporated new information into current stock prices ensure that an economy allocates its resources efficiently indicates that returns follow a random-walk process
indicate that the market has not incorporated new information into current stock prices
Another name for the dollar-weighted return is the __________. difference between cash inflows and cash outflows arithmetic average return geometric average return internal rate of return
internal rate of return
One type of passive portfolio management is __________. investing in a well-diversified portfolio without attempting to search out mispriced securities investing in a well-diversified portfolio while only seeking out passively mispriced securities investing an equal dollar amount in index stocks investing in an equal amount of shares in each of the index stocks
investing in a well-diversified portfolio without attempting to search out mispriced securities
A security's beta coefficient will be negative if __________. its returns are negatively correlated with market-index returns its returns are positively correlated with market-index returns its stock price has historically been very stable market demand for the firm's shares is very low
its returns are negatively correlated with market-index returns
On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie __________ the current investment opportunity set. left and above left and below right and above right and below
left and above
Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is __________. 1 less than 1 between 0 and 1 (and therefore not negative) less than or equal to 0 (and therefore not positive)
less than 1
Beta is a measure of security responsiveness to __________. firm-specific risk diversifiable risk market risk unique risk
market risk
The efficient frontier represents a set of portfolios that: maximize expected return for a given level of risk. minimize expected return for a given level of risk. maximize risk for a given level of return. None of the options are correct.
maximize expected return for a given level of risk.
The normal distribution is completely described by its __________. mean and standard deviation mean mode and standard deviation median and variance
mean and standard deviation
The primary objective of fundamental analysis is to identify __________. well-run firms poorly run firms mispriced stocks high P/E stocks
mispriced stocks
The possibility of arbitrage arises when __________. there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily mispricing among securities creates opportunities for riskless profits two identically risky securities carry the same expected returns investors do not diversify
mispricing among securities creates opportunities for riskless profits
Diversification is most effective when security returns are __________. high negatively correlated positively correlated uncorrelated
negatively correlated
An implication of the efficient market hypothesis is that __________. high-beta stocks are consistently overpriced low-beta stocks are consistently overpriced nonzero alphas will quickly disappear growth stocks are better buys than value stock
nonzero alphas will quickly disappear
According to the capital asset pricing model, a fairly priced security will plot __________. above the security market line on the security market line below the security market line at no relation to the security market line
on the security market line
An investor's degree of risk aversion will determine their __________. optimal risky portfolio risk-free rate optimal mix of the risk-free asset and risky asset capital allocation line
optimal mix of the risk-free asset and risky asset
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 __________. fairly priced overpriced underpriced None of these answers are correct.
overpriced
The efficient market hypothesis suggests that _______. Multiple Choice active portfolio management strategies are the most appropriate investment strategies passive portfolio management strategies are the most appropriate investment strategies either active or passive strategies may be appropriate, depending on the expected direction of the market a bottom-up approach is the most appropriate investment strategy
passive portfolio management strategies are the most appropriate investment strategies
Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _______. earn no more than the Treasury-bill rate on either security pay less for the security that has higher risk pay less for the security that has lower risk earn more if interest rates are lower
pay less for the security that has higher risk
According to the capital asset pricing model, a security with a __________ negative alpha is considered a good buy positive alpha is considered overpriced positive alpha is considered underpriced zero alpha is considered a good buy
positive alpha is considered underpriced
The material wealth of society is determined by the economy's _______, which is a function of the economy's _______. investment bankers; financial assets investment bankers; real assets productive capacity; financial assets productive capacity; real assets
productive capacity; real assets
A _______ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date. call option futures contract put option interest rate swap
put option
The excess return is the __________. rate of return that can be earned with certainty rate of return in excess of the Treasury-bill rate rate of return in excess of a predicted model like CAPM index return
rate of return in excess of the Treasury-bill rate
Most evidence indicates that U.S. stock markets are __________. reasonably weak-form and semistrong-form efficient strong-form efficient reasonably weak-form but not semistrong- or strong-form efficient neither weak-, semistrong-, nor strong-form efficient
reasonably weak-form and semistrong-form efficient
Beta is a measure of __________. total risk relative systematic risk relative nonsystematic risk relative business risk
relative systematic risk
Ownership of a call option entitles the owner to the _______ to _______ a specific stock, on or before a specific date, at a specific price right; buy right; sell obligation; buy obligation; sell
right; buy
Ownership of a put option entitles the owner to the _______ to _______ a specific stock, on or before a specific date, at a specific price. right; buy right; sell obligation; buy obligation; sell
right; sell
After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of _______. asset allocation security analysis top-down portfolio management passive management
security analysis
Empirical results estimated from historical data indicate that betas __________. are always close to zero are constant over time of all securities are always between zero and 1 seem to regress toward 1 over time
seem to regress toward 1 over time
If you believe in the __________-form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders. semistrong strong weak perfect
semistrong
A measure of the riskiness of an asset held in isolation is __________. beta standard deviation covariance alpha
standard deviation
The term random walk is used in investments to refer to __________. stock price changes that are random but predictable stock prices that respond slowly to both old and new information stock price changes that are random and unpredictable stock prices changes that follow the pattern of past price changes
stock price changes that are random and unpredictable
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 variance of the market stock's beta covariance with the market index
stock's standard deviation
If you believe in the __________-form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders. semistrong strong weak perfect
strong
Most people would readily agree that the stock market is not __________. weak-form efficient semistrong-form efficient strong-form efficient efficient at all
strong-form efficient
A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________. firm-specific risk systematic risk unique risk None of the options are correct
systematic risk
Investors require a risk premium as compensation for bearing __________. unsystematic risk alpha risk residual risk systematic risk
systematic risk
Market risk is also called __________ and __________. systematic risk; diversifiable risk systematic risk; nondiversifiable risk unique risk; nondiversifiable risk unique risk; diversifiable risk
systematic risk; nondiversifiable risk
Random price movements indicate __________. irrational markets that prices cannot equal fundamental values that technical analysis to uncover trends can be quite useful that markets are functioning efficiently
that markets are functioning efficiently
An important characteristic of market equilibrium is __________. the presence of many opportunities for creating zero-investment portfolios all investors exhibit the same degree of risk aversion the absence of arbitrage opportunities the lack of liquidity in the market
the absence of arbitrage opportunities
Asset allocation refers to _______. Multiple Choice the allocation of the investment portfolio across broad asset classes the analysis of the value of securities the choice of specific assets within each asset class None of the choices are correct.
the allocation of the investment portfolio across broad asset classes
The holding period return on a stock is equal to __________. the capital gain yield over the period plus the inflation rate the capital gain yield over the period plus the dividend yield the current yield plus the dividend yield the dividend yield plus the risk premium
the capital gain yield over the period plus the dividend yield
The term excess return refers to __________. returns earned illegally by means of insider trading the difference between the rate of return earned and the risk-free rate the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk the portion of the return on a security that represents tax liability and therefore cannot be reinvested
the difference between the rate of return earned and the risk-free rate
The success of common stock investments depends on the success of _______. derivative securities fixed-income securities the firm and its real assets government methods of allocating capital
the firm and its real assets
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that __________. the returns on the stock and bond portfolios tend to move inversely the returns on the stock and bond portfolios tend to vary independently of each other the returns on the stock and bond portfolios tend to move together the covariance of the stock and bond portfolios will be positive
the returns on the stock and bond portfolios tend to vary independently of each other
The complete portfolio refers to the investment in __________. the risk-free asset the risky portfolio the risk-free asset and the risky portfolio combined the risky portfolio and the index
the risk-free asset and the risky portfolio combined
The term complete portfolio refers to a portfolio consisting of __________. the risk-free asset combined with at least one risky asset the market portfolio combined with the minimum-variance portfolio securities from domestic markets combined with securities from foreign markets common stocks combined with bonds
the risk-free asset combined with at least one risky asset
The reward-to-volatility ratio is given by __________. the slope of the capital allocation line the second derivative of the capital allocation line the point at which the second derivative of the investor's indifference curve reaches zero the portfolio's excess return
the slope of the capital allocation line
According to capital asset pricing theory, the key determinant of portfolio returns is __________. the degree of diversification the systematic risk of the portfolio the firm-specific risk of the portfolio economic factors
the systematic risk of the portfolio
The expected rate of return of a portfolio of risky securities is __________. the sum of the individual securities' covariance the sum of the individual securities' variance the weighted sum of the individual securities' expected returns the weighted sum of the individual securities' variance
the weighted sum of the individual securities' expected returns
The correlation coefficient between two assets equals __________. their covariance divided by the product of their variances the product of their variances divided by their covariance the sum of their expected returns divided by their covariance their covariance divided by the product of their standard deviations
their covariance divided by the product of their standard deviations
Standard deviation of portfolio returns is a measure of __________. total risk relative systematic risk relative nonsystematic risk relative business risk
total risk
Firm-specific risk is also called __________ and __________. systematic risk; diversifiable risk systematic risk; nondiversifiable risk unique risk; nondiversifiable risk unique risk; diversifiable risk
unique risk; diversifiable risk
In a well-diversified portfolio, __________ risk is negligible. nondiversifiable market systematic unsystematic
unsystematic
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier __________ and to the __________ up; right up; left down; right down; left
up; left
Evidence supporting semistrong-form market efficiency suggests that investors should __________. rely on technical analysis to select securities rely on fundamental analysis to select securities use a passive trading strategy such as purchasing an index fund or an ETF rely on a combination of technical and fundamental analysis to select securities
use a passive trading strategy such as purchasing an index fund or an ETF
The values of beta coefficients of securities are __________. always positive always negative always between positive 1 and negative 1 usually positive but are not restricted in any particular way
usually positive but are not restricted in any particular way
According to the capital asset pricing model, fairly priced securities have __________. negative betas positive alphas positive betas zero alphas
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? σ2P < w21 × σ21 + w22 × σ22 σ2P = w21 × σ21 + w22 × σ22 σ2P < w21 × σ21 − w22 × σ22 σ2P > w21 × σ21 + w22 × σ22
σ2P > w21 × σ21 + w22 × σ22