FIN 430 Chapter 6 Assignment/Poll Questions

unique risk; diversifiable risk

Firm-specific risk is also called _____ and _____.

.511

The standard deviation of return on investment A is .16, while the standard deviation of return on investment B is .11. If the covariance of returns on A and B is .009, the correlation coefficient between the returns on A and B is _________.

up; left

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

market risk

Beta is a measure of security responsiveness to _________.

negatively correlated

Diversification is most effective when security returns are _____.

unique firm-specific diversifiable all of these options

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

Portfolio B, expected return 9%, standard deviation 26%

Which of the following portfolios most likely falls below the efficient frontier? Portfolio A, expected return 7%, standard deviation 14% Portfolio B, expected return 9%, standard deviation 26% Portfolio C, expected return 12%, standard deviation 22%

If the correlation coefficient were 0, a zero-variance portfolio could be constructed

Which of the following statements about correlation is least likely correct? Potential benefits from diversification arise when correlation is less than 1 If the correlation coefficient were 0, a zero-variance portfolio could be constructed The lower the correlation coefficient, the greater the potential benefits from diversification

Portfolio invested in the stock 84.06% Portfolio invested in the bond 15.94% Expected return 15.57% Standard deviation 32.31%

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 4.7%. The probability distribution of the risky funds is as follows: Fund; Expected Return; Standard Deviation Stock fund (S); 17%; 37% Bond fund (B); 8; 31 The correlation between the fund returns is 0.17. Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio.

Reward-to-volatility ratio 0.2374

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 4.2%. The probability distributions of the risky funds are: Fund; Expected Return; Standard Deviation Stock fund (S); 12%; 33% Bond fund (B); 5%; 26% The correlation between the fund returns is .0308. What is the reward-to-volatility ratio of the best feasible CAL?

a. Standard deviation 20.56% b-1. Proportion invested in the T-bill fund 11.92% b-2. Proportion Invested Stocks 56.95% Bonds 31.13%

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: Fund; Expected Return; Standard Deviation Stock fund (S); 15%; 32% Bond fund (B); 9%; 23% The correlation between the fund returns is 0.15. Suppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL. a. What is the standard deviation of your portfolio? b-1. What is the proportion invested in the T-bill fund? b-2. What is the proportion invested in each of the two risky funds?

.831

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 16%, while stock B has a standard deviation of return of 22%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .031, the correlation coefficient between the returns on A and B is _________.

decrease

A portfolio manager adds a new stock that has the same standard deviation of returns as the existing portfolio but has a correlation coefficient with the existing portfolio that is less than 1. If the new stock is added, the portfolio standard deviation will

5.3%

A portfolio was created by investing 25% of the fund in assets A (standard deviation = 15%) and the rest of the funds in assets B (standard deviation = 10%). If the correlation coefficient is -0.75, what is the portfolio's standard deviation?

10.6%

A portfolio was created by investing 25% of the fund in assets A (standard deviation = 15%) and the rest of the funds in assets B (standard deviation = 10%). If the correlation coefficient is 0.75, what is the portfolio's standard deviation?

0.75

A stock has a correlation with the market of 0.58. The standard deviation of the market is 28%, and the standard deviation of the stock is 36%. What is the stock's beta?

Decline more if only stock B is purchased

An investor currently owns stock A and is thinking of adding either B or C to his holdings. All three stocks offer the same expected return and total risk. The correlation between A and B is -0.5 and between A and C is 0.5. The portfolio's risk will ___

asset A

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 ______.

negatively correlated

Diversification is most effective when security returns are _________.

left and above

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

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

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

III and IV 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

0.10

The standard deviation of return is 0.3 for stock A and 0.2 for stock B. The covariance between the returns of A and B is 0.006. The correlation of returns between A and B is:

a. Total variance 0.1184 b. Total variance 0.1184

The standard deviation of the market-index portfolio is 10%. Stock A has a beta of 2.70 and a residual standard deviation of 20%. a. Calculate the total variance for an increase of 0.10 in its beta. b. Calculate the total variance for an increase of 1.33% in its residual standard deviation.

1.32

You run a regression for a stock's return on a market index and find the following Excel output: The beta of this stock is ____.