Fundamentals of Investment Chapter 6 Concepts

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

-1.0

You run a regression for a stock's return on a market index and find the following Excel output: Multiple R 0.35 R-Square 0.12 Adjusted R-Square 0.02 Standard Error 38.45 Observations 12 Coefficients Standard Error t-Stat p-Value Intercept 4.05 15.44 0.26 0.80 Market 1.32 0.97 1.36 0.10 The stock is ________ riskier than the typical stock.

32%

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

6

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 ________.

Asset A

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

I and II only

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

I and III

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

I, II, and III

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

III and IV only

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Stock A

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?

Stock A is riskier.

Risk that can be eliminated through diversification is called ________ risk.

Unique, Firm-Specific, and Diversifiable

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

Which one of the following stock return statistics fluctuates the most over time?

average return

The ________ is the covariance divided by the product of the standard deviations of the returns on each fund.

correlation coefficient

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ________.

correlation coefficient between ACE and the market has risen

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

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

A security's beta coefficient will be negative if ________.

its returns are negatively correlated with market-index returns

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the ________ the current investment opportunity set.

left and above

Beta is a measure of security responsiveness to ________.

market risk

The efficient frontier represents a set of portfolios that

maximize expected return for a given level of risk.

Diversification is most effective when security returns are ________.

negatively correlated

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?

none of these options (With a correlation of 1, no risk will be reduced.)

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

optimal mix of the risk-free asset and risky asset

Market risk is also called ________ and ________.

systematic risk; nondiversifiable risk

The term excess return refers to ________.

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

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 vary independently of each other

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

The correlation coefficient between two assets equals ________.

their covariance divided by the product of their standard deviations

Firm-specific risk is also called ________ and ________.

unique risk; diversifiable risk

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

up; left

The values of beta coefficients of securities are ________.

usually positive but are not restricted in any particular way

Which of the following statistics cannot be negative?

variance

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 > (W1 2σ1 2 + W2 2σ2 2)