INV 6

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

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

.75

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? A. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 - W22σ22) D. σ2rp > (W12σ12 + W22σ22)

σ2rp > (W12σ12 + W22σ22)

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

20

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.

20% more

You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.

3.12

Which of the following statistics cannot be negative?

variance

The _______ decision should take precedence over the _____ decision.

asset allocation; stock selection

A measure of the riskiness of an asset held in isolation is ____________.

standard deviation

Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4

-.9

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

-1

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?

.40

Which of the following correlation coefficients will produce the least diversification benefit? A. -.6 B. -.3 C. 0 D. .8

.8

The market value weighted-average beta of firms included in the market index will always be _____________.

1

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

1

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

I and II only

As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall.

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

I, II, and III

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.

II and III only

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

Diversification is most effective when security returns are _________.

negatively correlated

Which of the following provides the best example of a systematic-risk event?

The Federal Reserve increases interest rates 50 basis points.

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

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

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

average return

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.

calculate three covariances

The ________ is equal to the square root of the systematic variance divided by the total variance.

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 risk that can be diversified away is __________.

firm-specific risk

The portfolio with the lowest standard deviation for any risk premium is called the_______.

global minimum variance portfolio

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

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.

increase the unsystematic risk of the portfolio

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

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is_____________.

less than 1

Rational risk-averse investors will always prefer portfolios _____________.

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

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.

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.

more than 12% but less than 18%

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.)

Diversification can reduce or eliminate __________ risk.

nonsystematic

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

optimal mix of the risk-free asset and risky asset

The plot of a security's excess return relative to the market's excess return is called the _______.

security characteristic line

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

A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called__________.

systematic risk

Harry Markowitz is best known for his Nobel Prize-winning work on _____________.

techniques used to identify efficient portfolios of risky assets

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

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.

their 401k accounts were not well diversified

The correlation coefficient between two assets equals _________.

their covariance divided by the product of their standard deviations

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

unique risk

Firm-specific risk is also called __________ and __________.

unique risk; diversifiable risk

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

unique, firm-specific, diversifiable ALL OPTIONS

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