Chapter 6

The variability of the rate of return on a security depends on ______________. A) uncertainty common to the entire market B) uncertainty due to firm specific factors C) Both a and b above D) None of the above answers is correct

C) Both a and b above

Which of the following portfolios cannot lie on the efficient frontier? A) Portfolio I B) Portfolio J C) Portfolio K D) Portfolio L

C) Portfolio K

In portfolio management, as the number of the securities increases:

-the importance of the covariance relationships increases -the importance of each individual security's risk decreases

This stock has greater systematic risk than a stock with a beta of ____. A) 0.50 B) 2.00 C) 4.00 D) all of the above

0.50

The beta of this stock is _____. A) 0.12 B) 0.35 C) 1.32 D) 4.05

1.32

____ percent of the variance is explained by this regression A) 12 B) 35 C) 4.05 D) 80

12

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? A) .40 B) .50 C) .75 D) .80

A) .40

The optimal risky portfolio is ___________________. A) always the same for all investors B) may vary from investor to investor due to tax considerations and other investor imposed constraints C) may vary from investor to investor due to degree of risk aversion D) will never involve short-selling

A) always the same for all investors

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 _______. A) asset A B) asset B C) no risky asset D) can't tell from the data given

A) asset A

The _______ decision should take precedence over the _____ decision. A) asset allocation, stock selection B) choice of fad, mutual fund selection C) stock selection, asset allocation D) stock selection, mutual fund selection

A) asset allocation, stock selection

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

consistent with capital market theory, systematic risk ____. A) refers to the variability in all risky assets caused by macroeconomic and other aggregate market-related variables B) is measured by the coefficient of variation of returns on the market portfolio C) refers to diversifiable risk D) all of the above

A) refers to the variability in all risky assets caused by macroeconomic and other aggregate market-related variables

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

The reward-to-variability ratio is computed as __________. A) standard deviation of returns B) excess returns on an asset divided by standard deviation C) returns on common stocks divided by returns on variable rate bonds D) the market risk premium divided by standard deviation

B) excess returns on an asset divided by standard deviation

Decreasing the number of stock in a portfolio from 50 to 10 would likely to _____. A) increase the systematic risk of the portfolio B) increase the nonsystematic risk of the portfolio C) increase the return of the portfolio D) none of the above

B) increase the nonsystematic risk of the portfolio

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 allocation line to those located on the efficient frontier C) at or near the minimum variance point on the efficient frontier D) Rational risk-averse investors prefer the risk-free asset to all other asset choices.

B) located on the capital allocation line to those located on the efficient frontier

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

B) negatively correlated

A measure of the riskiness of an asset held in isolation is _____________. A) beta B) standard deviation C) covariance D) semi-variance

B) standard deviation

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

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 which represents tax liability and therefore cannot be reinvested

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

Adding additional risky assets will generally move the efficient frontier _____ and to the _______. A) up, right B) up, left C) down, right D) down, left

B) up, left

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) There is no particular rule concerning the average beta of firms included in the market index

C) 1

The term efficient frontier refers to the set of portfolios that _________________. A) yield the greatest return for a given level of risk B) involve the least risk for a given level of return C) Both a and b above D)None of the above answers are correct

C) Both a and b above

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

As additional securities are added to a portfolio, total risk will generally ________ at a _________ rate. A) rise; decreasing B) rise; increasing C) fall; decreasing D) fall; increasing

C) fall; decreasing

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and ___________. A) identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs B) identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C) 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 D)None of the above answers is correct

C) 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

Beta is a measure of __________. A) firm specific risk B) diversifiable risk C) market risk D) unique risk

C) market risk

An investor's degree of risk aversion will determine his _______. A) optimal risky portfolio B) risk-free rate C) mix of risk-free asset and optimal risky asset D) choice of risk free asset

C) mix of risk-free asset and optimal risky asset

Used appropriately, diversification can reduce or eliminate __________ risk. A) all B) systematic C) non-systematic D) None of the above

C) non-systematic

The optimal risky portfolio can be identified by finding _____________. A) the minimum variance point on the efficient frontier B) the maximum return point on the efficient frontier C) the tangency point of the capital allocation line and the efficient frontier D) None of the above answers is correct

C) the tangency point of the capital allocation line and the efficient frontier

Expected return-standard deviation combinations corresponding to any individual risky asset _________________. A) will always end up on the efficient frontier B) will always end up on the efficient frontier or within the efficient frontier, but never outside the efficient frontier C) will always end up within the efficient frontier D) may end up anywhere in expected return-standard deviation space

C) will always end up within the efficient frontier

In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of _________. A) 1.0 B) 0.5 C) 0 D) -1.0

D) -1.0

Risk that can be eliminated through diversification is called ______ risk. A) non-systematic B) firm-specific C) diversifiable D) all of the above

D) all of the above

The measure of risk used in the Capital Asset Pricing Model is ____________. A) specific risk B) the standard deviation of returns C) reinvestment risk D) beta

D) beta

The systematic risk of a security __________. A) is likely to be higher in a rising market B) results from its own unique factors C) depends upon market volatility D) cannot be diversified away

D) cannot be diversified away

According to Markowitz, and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits. A) diversification B) investing in Treasury bills C) investing in stocks of utility companies D) engaging in active portfolio management to enhance returns

D) engaging in active portfolio management to enhance returns

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

return of 5% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .5. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The variance of return on the portfolio is __________. A) .0035 B) .0085 C) .0094 D).0103

D).0103

The slope of a capital allocation line measures the reward-to-variability ratio of ___________. A) all portfolios on the efficient frontier B) all portfolios on the capital market line C) the minimum variance portfolio only D)all portfolios on the capital allocation line

D)all portfolios on the capital allocation line

Combining securities with zero correlation does what to the risk?

Reduces the risk

What is being risk averse?

This describes most of us. We don't like risk, but are willing to accept some if we are compensated for doing it.