Question 1

A statistical measure of the degree to which two or more series move together or co-vary is best described as:

Accepted Answer

Covariance is a measure that determines the degree to which two variables change in tandem. It's used to understand how two variables are related to each other, indicating if increases in one variable correspond with increases (positive covariance) or decreases (negative covariance) in the other.

Question 2

Which of the following is not a statistical measure of the degree to which two or more series move together or co-vary?

Accepted Answer

Standard deviation is a measure of the dispersion or variability of a set of data points around their mean, not a measure of how two or more series move together.

Question 3

Which of the following statements is true?

Accepted Answer

A correlation coefficient of +1 indicates a perfect positive correlation, meaning that as one variable increases, the other variable increases in a perfectly linear manner. Options A and B are incorrect because the correlation coefficient ranges from -1 to +1, and option D is incorrect because a zero correlation indicates no linear relationship between the variables.

Question 4

Which of the following statements is false?

Accepted Answer

A correlation coefficient of zero does not imply that stocks in the same industry will have no relationship. In fact, stocks in the same industry often move together due to industry-specific factors, implying a correlation greater than zero.

Question 5

Following is a chart of the correlation between the returns of stock C and stock D.  The correlation between the two returns is best described as:

Accepted Answer

The answer of Following is a chart of the correlation...

Question 6

Following is a chart of the correlation between the returns of stock E and stock F. The correlation between the returns on these two stocks is best described as:

Accepted Answer

The answer of Following is a chart of the correlation...

Question 7

Stock returns are typically:

Accepted Answer

Stock returns are typically positively correlated with the returns of other stocks, meaning when one stock's returns increase, the returns of other stocks tend to increase as well, though the correlation is not perfect.

Question 8

Diversification is most effective when the returns on assets are:

Accepted Answer

Diversification is most effective when the returns on assets are perfectly, negatively correlated with the returns of other assets. This is because negative correlation means that when one asset's return decreases, the other's increases, which reduces overall portfolio risk.

Question 9

Using the given correlation matrix, which of the following statements is incorrect?

Accepted Answer

The answer of Using the given correlation matrix, which of...

Question 10

Using the given correlation matrix of these product lines, which of the following statements is correct?

Accepted Answer

The answer of Using the given correlation matrix of these...

Question 11

Which of the following is the basis for hedging?

Accepted Answer

Hedging is based on perfect negative correlation, where the gain in one investment offsets the loss in another, minimizing overall risk.

Question 12

What is the likely correlation between milk, bread, and rice?

Accepted Answer

Milk, bread, and rice are basic food items that are commonly purchased together, especially in household shopping. When people buy one, they are likely to buy the others, indicating a positive correlation among their purchase behaviors.

Question 13

What is the likely correlation between gold and speculative internet stocks?

Accepted Answer

Gold often acts as a safe-haven asset during times of economic uncertainty or market volatility, while speculative internet stocks are considered high-risk investments that can fluctuate greatly. Therefore, when investors are wary and move towards gold, they might simultaneously move away from riskier assets like speculative internet stocks, leading to a negative correlation between the two.

Question 14

Suppose that you read that the stock prices of drug companies do not vary with gross domestic product (GDP). This would mean that the correlation between the drug company stock prices and GDP is:

Accepted Answer

If the stock prices of drug companies do not vary with GDP, it means there is no linear relationship between them, which is indicated by a correlation of zero.

Question 15

Consider the following time series:
 The correlation between these two series is best described as:

Accepted Answer

The answer of Consider the following time series:
 The correlation...

Question 16

The collection of investments that offers the highest expected return for a given level of risk, or offers the lowest risk for a given expected return is best described as a(n):

Accepted Answer

An efficient portfolio is defined as one that offers the highest expected return for a given level of risk or the lowest level of risk for a given expected return, according to modern portfolio theory. This concept is central to the efficient frontier and portfolio optimization.

Question 17

Complete the following: Modern Portfolio ______ is a set of theories that explain how _________investors, who are risk ________, can select a set of investments that ____________ the expected return for a given level of _______.

Accepted Answer

Modern Portfolio Theory explains how rational investors, who are risk averse, can select a set of investments that maximize the expected return for a given level of risk.

Question 18

Which of the following is not an assumption of Modern Portfolio Theory?

Accepted Answer

Modern Portfolio Theory (MPT) assumes that investors are risk averse, rational, and make decisions based on the expected return and risk of their portfolios. It does not assume that risk comes from not knowing what you are doing; instead, it quantifies risk in terms of the variability of returns.

Question 19

Which of the following portfolios could not lie on the efficient frontier?

Accepted Answer

The answer of Which of the following portfolios could not...

Question 20

Which of the following portfolios could not lie on the efficient frontier?

Accepted Answer

The answer of Which of the following portfolios could not...

Quiz 8: Risk, Return, and Portfolio Theory

A statistical measure of the degree to which two or more series move together or co-vary is best described as:

Which of the following is not a statistical measure of the degree to which two or more series move together or co-vary?

Which of the following statements is true?

Which of the following statements is false?

Following is a chart of the correlation between the returns of stock C and stock D. The correlation between the two returns is best described as:

Following is a chart of the correlation between the returns of stock E and stock F. The correlation between the returns on these two stocks is best described as:

Stock returns are typically:

Diversification is most effective when the returns on assets are:

Using the given correlation matrix, which of the following statements is incorrect?

Using the given correlation matrix of these product lines, which of the following statements is correct?

Which of the following is the basis for hedging?

What is the likely correlation between milk, bread, and rice?

What is the likely correlation between gold and speculative internet stocks?

Suppose that you read that the stock prices of drug companies do not vary with gross domestic product (GDP) . This would mean that the correlation between the drug company stock prices and GDP is:

Consider the following time series: The correlation between these two series is best described as:

The collection of investments that offers the highest expected return for a given level of risk, or offers the lowest risk for a given expected return is best described as a(n) :

Complete the following: Modern Portfolio __ is a set of theories that explain how _investors, who are risk , can select a set of investments that __ the expected return for a given level of _.

Which of the following is not an assumption of Modern Portfolio Theory?

Which of the following portfolios could not lie on the efficient frontier?

Which of the following portfolios could not lie on the efficient frontier?