6

46. Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A. 20% more B. slightly more C. 20% less D. slightly less

A. 20% more

2. The _______ decision should take precedence over the _____ decision. A. asset allocation; stock selection B. bond selection; mutual fund selection C. stock selection; asset allocation D. stock selection; mutual fund selection

A. Asset allocation; stock selection

54. A security's beta coefficient will be negative if ____________. A. its returns are negatively correlated with market-index returns B. its returns are positively correlated with market-index returns C. its stock price has historically been very stable D. market demand for the firm's shares is very low

A. its returns are negatively correlated with market-index returns

24. On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below

A. left and above

59. 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 ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index

A. stock's standard deviation

25. The term complete portfolio refers to a portfolio consisting of _________________. A. the risk-free asset combined with at least one risky asset B. the market portfolio combined with the minimum-variance portfolio C. securities from domestic markets combined with securities from foreign markets D. common stocks combined with bonds

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

45. The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market A. I only B. I and II only C. II and III only D. I, II, and III

B. I and II only

49. 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 ______________. A. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope

B. all fall on the line of best fit; negative slope

8. The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to-variability ratio

B. correlation coefficient

15. The risk that can be diversified away is __________. A. beta B. firm-specific risk C. market risk D. systematic risk

B. firm-specific risk

68. Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year

B. increase the unsystematic risk of the portfolio

58. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0

B. less than 1

26. Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum-variance point on the efficient frontier D. that are risk-free to all other asset choices

B. located on the capital market line to those located on the efficient frontier

12. Diversification is most effective when security returns are _________. A. high B. negatively correlated C. positively correlated D. uncorrelated

B. negatively correlated

43. A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. alpha

B. standard deviation

75. A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________. A. firm-specific risk B. systematic risk C. unique risk D. none of the options

B. systematic risk

18. Market risk is also called __________ and _________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

B. systematic risk; nondiversifiable risk

50. The term excess return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

B. the difference between the rate of return earned and the risk-free rate

22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to vary independently of each other C. the returns on the stock and bond portfolios tend to move together D. the covariance of the stock and bond portfolios will be positive

B. the returns on the stock and bond portfolios tend to vary independently of each other

6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up; right B. up; left C. down; right D. down; left

B. up; left

9. Which of the following statistics cannot be negative? A. Covariance B. Variance C. E(r) D. Correlation coefficient

B. variance

55. The market value weighted-average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

C. 1

72. What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A. -1 B. 0 C. 1 D. .5

C. 1

27. 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

20. Which one of the following stock return statistics fluctuates the most over time? A. Covariance of returns B. Variance of returns C. Average return D. Correlation coefficient

C. average return

69. If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks

C. calculate three covariances

17. 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 _________. A. equal to the sum of the securities' standard deviations B. equal to -1 C. equal to 0 D. greater than 0

C. equal to 0

28. The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; steepest B. highest; flattest C. highest; steepest D. lowest; flattest

C. highest; steepest

14. Beta is a measure of security responsiveness to _________. A. firm-specific risk B. diversifiable risk C. market risk D. unique risk

C. market risk

56. Diversification can reduce or eliminate __________ risk. A. all B. systematic C. nonsystematic D. only an insignificant

C. nonsystematic

7. 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

13. The expected rate of return of a portfolio of risky securities is _________. A. the sum of the securities' covariances B. the sum of the securities' variances C. the weighted sum of the securities' expected returns D. the weighted sum of the securities' variances

C. the weighted sum of the securities' expected returns

57. To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1 B. .5 C. 0 D. -1

D. -1

16. Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A. 2 B. 6 C. 8 D. 20

D. 20

1. Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

D. All of these options

47. Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk A. I only B. I and II only C. I, II, and III D. I and III

D. I and III

77. You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A. I only B. I and II only C. I and III only D. I, II, and III

D. I, II, and III

74. Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. Market risk B. Unique risk C. Unsystematic risk D. None of these options (With a correlation of 1, no risk will be reduced.)

D. None of these options (with a correlation of 1, no risk will be reduced)

73. Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. Market risk B. Nondiversifiable risk C. Systematic risk D. Unique risk

D. unique risk

19. Firm-specific risk is also called __________ and __________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

D. unique risk; diversifiable risk

53. The values of beta coefficients of securities are __________. A. always positive B. always negative C. always between positive 1 and negative 1 D. usually positive but are not restricted in any particular way

D. usually positive but are not restricted in any particular way