FINA 469 HW 4

Which of the following statistics cannot be negative?

Variance

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

Up; left

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

-.9

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

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

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

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

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

Less than 1

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 the risky asset

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

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

Unique risk

The ______ reward-to-variability ratio is found on the ______ capital market line.

highest; steepest