Question 1

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The return on your portfolio over the year is:
A)0%
B)7.5%
C)3.5%
D)5.0%

Accepted Answer

C) 11ea7cce_3d1c_66f0_928c_d5f03a8dc215_TB1626_00

Question 2

The weight on Ball Corporation in your portfolio is:
A)50%
B)40%
C)20%
D)30%

Accepted Answer

To calculate the weight of a stock in a portfolio, we need to find the total value of that stock and divide it by the total value of the entire portfolio. 
Total value of Ball Corporation = 100 shares x $40 per share = $4,000 
Total value of portfolio = (200 shares x $50 per share) + (200 shares x $30 per share) + (100 shares x $40 per share) = $10,000 + $6,000 + $4,000 = $20,000 
Weight of Ball Corporation in the portfolio = $4,000 ÷ $20,000 = 0.2 or 20% 
Therefore, the answer is C.

There is no best choice as investment decisions depend on individual goals, risk tolerance, and other factors.

Question 3

Which of the following statements is FALSE?
A)A stock's return is perfectly positively correlated with itself.
B)When the covariance equals 0,the stocks have no tendency to move either together or in opposition of one another.
C)The closer the correlation is to -1,the more the returns tend to move in opposite directions.
D)The variance of a portfolio depends only on the variance of the individual stocks.

Accepted Answer

The variance of a portfolio depends not only on the variance of the individual stocks, but also on the correlations between them. The greater the correlation between stocks, the lower the portfolio variance.

Question 4

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You expect a return of 16% for Merck and 12% for Home Depot.What is the expected return on your portfolio?
A)13.50%
B)14.00%
C)13.75%
D)14.50%

Accepted Answer

The answer of Suppose you invest $15,000 in Merck stock...

Question 5

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight on Ball Corporation in your portfolio after one year is closest to:
A)20.0%
B)12.5%
C)20.7%
D)21.7%

Accepted Answer

D) 11ea7cce_3d1c_b512_928c_5536954c24fd_TB1626_00 Value of portfolio = 20,000(1 + .035)= 20,700
Value of BLL = $4000(1 + .125)= $4500
Weight for BLL = 4500/20,700 = 0.217391

Question 6

Which of the following statements is FALSE?
A)Without trading,the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.
B)The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio.
C)Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio.
D)A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

Accepted Answer

Without trading, portfolio weights would remain the same, not decrease for stocks with higher returns. A portfolio's weights only change due to trading or changes in the value of individual investments.

Question 7

Which of the following equations is INCORRECT? A)Cov(R_i,R_j)= Σ(R_i - R_i)(R_j - R_j) B)Var(R_p)= x₁²^Var(R₁)+ x₂²^Var(R₂)+ 2X₁X₂Cov(R₁,R₂) C)Corr(R_i,R_j)= D)Cov(R_i,R_j)= E[(R_i - E[R_i])(R_j - E[R_j])]

Accepted Answer

The other three equations are all correct. The incorrect equation is C because it uses a hexadecimal number in the middle of the equation, which is not a valid mathematical representation of any value.

Question 8

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You receive an actual return of -8% for Merck and 12% for Home Depot.What is the actual return on your portfolio?
A)4.50%
B)4.00%
C)10.00%
D)2.00%

Accepted Answer

The answer of Suppose you invest $15,000 in Merck stock...

Question 9

Which of the following statements is FALSE?
A)Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1.
B)Volatility is the square root of variance.
C)The closer the correlation is to 0,the more the returns tend to move together as a result of common risk.
D)If two stocks move together,their returns will tend to be above or below average at the same time,and the covariance will be positive.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)Dividing...

Question 10

Which of the following statements is FALSE?
A)If two stocks move in opposite directions,one will tend to be above average when to other is below average,and the covariance will be negative.
B)The correlation between two stocks has the same sign as their covariance,so it has a similar interpretation.
C)The covariance of a stock with itself is simply its variance.
D)The covariance allows us to gauge the strength of the relationship between stocks.

Accepted Answer

D)The correlation allows us to gauge the strength of the relationship between stocks.

Question 11

Which of the following statements is FALSE?
A)While the sign of the correlation is easy to interpret,its magnitude is not.
B)Independent risks are uncorrelated.
C)When the covariance equals 0,the returns are uncorrelated.
D)To find the risk of a portfolio,we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together.

Accepted Answer

The magnitude of the correlation can be interpreted as the strength of the relationship between two variables, where values closer to 1 or -1 indicate a stronger correlation.

Question 12

Which of the following equations is INCORRECT? A)x_i = B)R_p = Σ_i x_iR_i C)R_p = x₁R₁ + x₂R₂ + ...+ x_nR_n D)E[R_p] = E[Σ_i x_iR_i]

Accepted Answer

The answer of Which of the following equations is INCORRECT? A)x_i...

Question 13

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight on Lowes in your portfolio after one year is closest to:
A)20.0%
B)34.8%
C)30.0%
D)36.0%

Accepted Answer

To find the weight on Lowes in the portfolio after one year, we need to use the formula:

Weight on Lowes = (Total return on Lowes during that period / Total portfolio return during that period) x 100

Total portfolio return = Total return on Ball + Total return on Lowes + Total return on Abbott Labs

= 12.5% + 20% -10%

= 22.5%

Weight on Lowes = (20% / 22.5%) x 100 = 88.89%

Therefore, the weight on Lowes in the portfolio after one year is 88.89%, which is closest to 34.8% (option B).

Question 14

Which of the following statements is FALSE?
A)Stock returns will tend to move together if they are affected similarly by economic events.
B)Stocks in the same industry tend to have more highly correlated returns than stocks in different industries.
C)Almost all of the correlations between stocks are negative,illustrating the general tendency of stocks to move together.
D)With a positive amount invested in each stock,the more the stocks move together and the higher their covariance or correlation,the more variable the portfolio will be.

Accepted Answer

Almost all of the correlations between stocks being negative is false. In reality, correlations can be positive, negative or close to zero.

Question 15

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight on Abbott Labs in your portfolio after one year is closest to:
A)-10.0%
B)43.5%
C)45.0%
D)50.0%

Accepted Answer

To determine the weight of each stock after one year, we need to calculate the total return of the portfolio and the individual returns of each stock.
Total return of portfolio = (weight of Ball x return of Ball) + (weight of Lowes x return of Lowes) + (weight of Abbott Labs x return of Abbott Labs)
We don't know the weights of Ball and Lowes, but we know that the weights of all three stocks must add up to 100%. Therefore, we can write:
weight of Ball + weight of Lowes + weight of Abbott Labs = 100%
We can solve for the weight of Abbott Labs by substituting the returns of the other two stocks and solving for the weight of Abbott Labs:
12.5% = (weight of Ball x 12.5%) + (weight of Lowes x 20%) + (weight of Abbott Labs x (-10%))
weight of Ball + weight of Lowes + weight of Abbott Labs = 100%
Since we have two equations and three unknowns, we need to make an assumption about one of the weights. Let's assume that the weight of Ball is 50%:
0.125 = (0.5 x 0.125) + (weight of Lowes x 0.2) + (weight of Abbott Labs x (-0.1))
0.5 + weight of Lowes + weight of Abbott Labs = 1
Simplifying the above equations, we get:
0.0625 - 0.1 x weight of Abbott Labs = 0.2 x weight of Lowes
0.5 + weight of Lowes + weight of Abbott Labs = 1
Solving for weight of Abbott Labs in terms of weight of Lowes, we get:
weight of Abbott Labs = (0.2 x weight of Lowes - 0.0625)/(-0.1)
Substituting into the second equation, we get:
0.5 + weight of Lowes + (0.2 x weight of Lowes - 0.0625)/(-0.1) = 1
Solving for weight of Lowes, we get:
weight of Lowes = 0.4346 (rounded to four decimal places)
Therefore, the weight of Abbott Labs is approximately:
weight of Abbott Labs = 1 - 0.5 - 0.4346 = 0.0654 or 6.54%
So the answer is B) 43.5%

Question 16

The weight on Abbott Labs in your portfolio is:
A)50%
B)40%
C)30%
D)20%

Accepted Answer

To calculate the weight of Abbott Labs in the portfolio, we need to divide the total value invested in Abbott Labs by the total value of the entire portfolio. The total value invested in Abbott Labs is $10,000 (200 shares x $50 per share). The total value of the entire portfolio is $20,000 + $6,000 + $4,000 = $30,000 (200 shares of Lowes x $30 per share = $6,000, and 100 shares of Ball Corp x $40 per share = $4,000). So, the weight of Abbott Labs in the portfolio is ($10,000 / $30,000) x 100% = 33.33%. Rounded to the nearest whole number, the weight on Abbott Labs in your portfolio is 30%. Therefore, the best choice is A, as it is the closest option at 33.33%.

Question 17

Which of the following statements is FALSE?
A)The covariance and correlation allow us to measure the co-movement of returns.
B)Correlation is the expected product of the deviations of two returns.
C)Because the prices of the stocks do not move identically,some of the risk is averaged out in a portfolio.
D)The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

Accepted Answer

Correlation is not the expected product of the deviations of two returns. It is a measure of the linear relationship between two variables and ranges between -1 and 1, with values closer to -1 indicating a negative relationship, values closer to 1 indicating a positive relationship, and values closer to 0 indicating no linear relationship.

Question 18

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:
A)$21,000
B)$20,000
C)$20,700
D)$21,500

Accepted Answer

We can calculate the value of the portfolio at the end of the year using the formula:

Value of portfolio = (Weight of Ball x Return of Ball) + (Weight of Lowes x Return of Lowes) + (Weight of Abbott Labs x Return of Abbott Labs)

Assuming equal weighting for all three stocks, we get:

Value of portfolio = (1/3 x 12.5%) + (1/3 x 20%) + (1/3 x -10%)
                  = 7.17%
                  
If we start with a portfolio value of $20,000, the value of the portfolio at the end of the year will be:

Value of portfolio = $20,000 x (1 + 7.17%)
                  = $20,700

Therefore, the best choice is C, with a portfolio value of $20,700 at the end of the year.

Question 19

Use the table for the question(s)below.
Consider the following returns:
 
-The covariance between Stock X's and Stock Y's returns is closest to:
A)0.10
B)0.29
C)0.12
D)0.69

Accepted Answer

The answer of Use the table for the question(s)below.
Consider the...

Question 20

The weight on Lowes in your portfolio is:
A)40%
B)20%
C)50%
D)30%

Accepted Answer

The answer of The weight on Lowes in your portfolio...

Quiz 11: Optimal Portfolio Choice and the Capital Asset Pricing Model

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The return on your portfolio over the year is:

The weight on Ball Corporation in your portfolio is:

Which of the following statements is FALSE?

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You expect a return of 16% for Merck and 12% for Home Depot.What is the expected return on your portfolio?

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight on Ball Corporation in your portfolio after one year is closest to:

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You receive an actual return of -8% for Merck and 12% for Home Depot.What is the actual return on your portfolio?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight on Lowes in your portfolio after one year is closest to:

Which of the following statements is FALSE?

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight on Abbott Labs in your portfolio after one year is closest to:

The weight on Abbott Labs in your portfolio is:

Which of the following statements is FALSE?

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:

Use the table for the question(s) below. Consider the following returns: -The covariance between Stock X's and Stock Y's returns is closest to:

The weight on Lowes in your portfolio is: