Question 1

If a stock portfolio is well diversified,then the portfolio variance
A)must be equal to or greater than the variance of the least risky stock in the portfolio.
B)will be a weighted average of the variances of the individual securities in the portfolio.
C)will equal the variance of the most volatile stock in the portfolio.
D)will be an arithmetic average of the variances of the individual securities in the portfolio.
E)may be less than the variance of the least risky stock in the portfolio.

Accepted Answer

A well-diversified portfolio can reduce unsystematic risk, potentially resulting in a portfolio variance that is lower than the variance of the least risky individual stock in the portfolio.

Question 2

Assume two securities are negatively correlated.If these two securities are combined into an equally weighted portfolio,the portfolio standard deviation must be
A)equal to the standard deviation of the overall market.
B)equal to the arithmetic average of the standard deviations of the individual securities.
C)equal to zero.
D)less than the weighted average of the standard deviations of the individual securities.
E)equal to or greater than the lowest standard deviation of the two securities.

Accepted Answer

When combining two negatively correlated securities, the portfolio standard deviation will be less than the weighted average of the standard deviations of the individual securities. This is because the negative correlation will result in the securities "canceling out" each other's risk to some degree, leading to a reduction in overall portfolio risk.

Question 3

Angelo anticipates earning a rate of return of 11.4 percent on his portfolio next year.The 11.4 percent is referred to as the
A)expected return.
B)future return.
C)holding period return.
D)actual return.
E)average return.

Accepted Answer

The 11.4 percent is referred to as the expected return, which is the return an investor anticipates earning on their investment based on projections and assumptions.

Question 4

Which statement correctly applies to the feasible set of returns for a portfolio consisting of domestic stocks,A and B? Assume that the expected returns are plotted against standard deviations.
A)Any combination of Stock A and Stock B that plot to the right of the minimum variance portfolio is an efficient portfolio.
B)Given any specific level of risk,the maximum obtainable rate of return will plot on the efficient frontier.
C)The minimum variance portfolio will move to the right on the risk-return graph if foreign securities are added to the portfolio.
D)To obtain the highest possible return,the portfolio return and standard deviation should plot above the feasible set.
E)The higher the correlation between Stocks A and B,the greater the bend in the curve of the feasible set.

Accepted Answer

The efficient frontier represents the portfolios that maximize expected return for a given level of risk (standard deviation). Therefore, given any specific level of risk, the maximum obtainable rate of return will plot on the efficient frontier. The minimum variance portfolio and the effect of adding foreign securities are not relevant to the statement about the feasible set. The statement about obtaining the highest possible return is incorrect because it suggests being above the feasible set, which is not possible. The statement about correlation and the bend in the curve of the feasible set is not clear and not relevant to the statement about the efficient frontier.

Question 5

The dominant portfolio with the lowest possible level of risk out of a set of portfolios consisting of two securities is referred to as the
A)efficient frontier.
B)minimum variance portfolio.
C)upper tail of the efficient set.
D)tangency portfolio.
E)risk-free portfolio.

Accepted Answer

The minimum variance portfolio is the one with the lowest possible level of risk out of a set of portfolios consisting of two securities. The efficient frontier refers to the set of portfolios that offer the highest level of return for a given level of risk. The upper tail of the efficient set refers to the portion of the efficient frontier that is beyond the point of tangency with the risk-free asset. The tangency portfolio is the point of highest Sharpe ratio on the efficient frontier. The risk-free portfolio is a portfolio that consists entirely of risk-free assets, with no exposure to risky assets.

Question 6

The expected return on a portfolio
A)can be greater than the expected return on the best performing security in the portfolio.
B)can be less than the expected return on the worst performing security in the portfolio.
C)is independent of the performance of the overall economy.
D)is limited by the returns on the individual securities within the portfolio.
E)is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal.

Accepted Answer

The answer of The expected return on a portfolio
A)can be...

Question 7

Which one of these measures the squared deviations of actual returns from expected returns?
A)Variance
B)Covariance
C)Beta
D)Correlation
E)Alpha

Accepted Answer

Variance measures the squared deviations of actual returns from expected returns.

Question 8

When computing the expected return on a portfolio of stocks the portfolio weights are based on the
A)number of shares owned in each stock.
B)price per share of each stock.
C)market value of the total shares held in each stock.
D)original amount invested in each stock.
E)cost per share of each stock held.

Accepted Answer

The portfolio weights should be based on the market value of the total shares held in each stock, as this reflects the portion of the overall portfolio that is invested in each stock. The number of shares, price per share, original amount invested, and cost per share do not necessarily reflect the relative importance of each stock within the portfolio.

Question 9

The standard deviation of a portfolio will tend to increase when
A)the portfolio concentration in a single cyclical industry increases.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to any other stock in the portfolio.
C)a risky asset in the portfolio is replaced with U.S.Treasury bills.
D)the weights of the various diverse securities become more evenly distributed.
E)short-term bonds are replaced with Treasury Bills.

Accepted Answer

The concentration of a portfolio in a single cyclical industry increases its exposure to systematic risk factors, such as macroeconomic variables that affect the entire industry. In turn, the portfolio's standard deviation increases because its return is more sensitive to external systematic shocks.

Question 10

The correlation between stocks A and B is equal to the A)standard deviation of A divided by the standard deviation of B. B)covariance_AB divided by the product of the standard deviations of A and B. C)standard deviation of B divided by the covariance_AB. D)sum of the variances of A and B divided by the covariance_AB. E)product of the standard deviation of A multiplied by the standard deviation of B divided by covariance_AB.

Accepted Answer

The correlation coefficient between two variables A and B is equal to their covariance divided by the product of their standard deviations, which is represented by the formula in choice B. Thus, choice B is the correct option. The other choices do not represent the formula for correlation coefficient accurately.

Question 11

Which one of these statements is correct regarding a portfolio of two risky securities?
A)Both the rate of return and the standard deviation of a portfolio can be changed by changing the portfolio weights.
B)The opportunity set is represented by a forward bending curve when expected returns are graphed against standard deviation.
C)Diversification occurs when the correlation between two securities is +1.
D)The standard deviation of a portfolio cannot be lower than the weighted average standard deviation of the securities held within the portfolio.
E)The minimum variance portfolio of two stocks also represents the portfolio's highest possible rate of return.

Accepted Answer

The rate of return and standard deviation of a portfolio depend on the weights of the securities in the portfolio. By changing the weights, we can change both the rate of return and the risk level (measured by standard deviation) of the portfolio.

Question 12

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of
A)−1
B)−0.5
C)0
D)0.5
E)1

Accepted Answer

A correlation of -1 indicates a perfectly negative correlation, meaning the two securities move in opposite directions. As a result, if one stock experiences a loss, the other stock will experience a gain, effectively canceling out the overall loss of the portfolio. This will lead to the greatest reduction in market risk.

Question 13

You plotted the monthly rate of return for two securities against time for the past 48 months.If the pattern of the movements of these two sets of returns rose and fell together the majority,but not all,of the time,then the securities have
A)no correlation at all.
B)a weak negative correlation.
C)a strong negative correlation.
D)a strong positive correlation.
E)a perfect positive correlation.

Accepted Answer

If the two sets of returns moved together for the majority of the time, they have a positive correlation. Moreover, a strong positive correlation exists between them because they rose and fell together for most of the time.

Question 14

Which one of the following statements is correct concerning the standard deviation of a portfolio?
A)Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
B)The greater the diversification of a portfolio,the greater the standard deviation of that portfolio.
C)Standard deviation measures only the systematic risk of a portfolio.
D)The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
E)The standard deviation of a portfolio must equal the weighted average of the standard deviations of the individual securities held within the portfolio.

Accepted Answer

The standard deviation of a portfolio can be lowered by changing the weights of the securities in the portfolio. This is because the standard deviation measures the variability of returns of the portfolio and changing the weights can reduce the overall volatility. The other options are incorrect: A is incorrect because standard deviation is not used to determine the amount of risk premium, B is incorrect because the greater the diversification of a portfolio, the lower the standard deviation, C is incorrect because standard deviation measures both systematic and unsystematic risk, and E is incorrect because the standard deviation of a portfolio is influenced by the covariances between securities, not just the weighted average of the individual standard deviations.

Question 15

Which one of these measures the interrelationship between two securities?
A)Standard deviation
B)Variance
C)Beta
D)Covariance
E)Alpha

Accepted Answer

Covariance measures the interrelationship between two securities, specifically how they move together. Standard deviation and variance measure risk, beta measures the volatility of a security in relation to the overall market, and alpha measures the excess return of a security compared to its expected return based on its level of risk.

Question 16

If there is no diversification benefit derived from combining two risky stocks into one portfolio,then the
A)returns on the two stocks must move perfectly in sync with one another.
B)returns on the two stocks must move perfectly opposite of one another.
C)stocks must have a zero correlation.
D)portfolio is equally weighted between the two stocks.
E)two stocks are completely unrelated to one another.

Accepted Answer

The absence of diversification benefits implies that the returns on the two stocks move perfectly in sync with one another, meaning they have a correlation coefficient of +1. This perfect positive correlation means that the stocks' returns move in the same direction to the same degree, eliminating the potential for diversification to reduce risk.

Question 17

The portfolio expected return considers which of the following factors?
I.The amount of money currently invested in each individual security
II.Various levels of economic activity
III.The performance of each stock given various economic scenarios
IV.The probability of various states of the economy occurring
A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV only

Accepted Answer

The portfolio expected return considers all the factors listed: the amount invested in each security, various economic scenarios, the performance of each stock in those scenarios, and the probability of different economic states.

Question 18

For an individual investor,the ideal portfolio could best be described as the portfolio that
A)has the lowest standard deviation given a specific expected rate of return.
B)lies above and to the left of the feasible set.
C)produces the highest rate of return.
D)qualifies as the minimum variance portfolio.
E)lies within the feasible set.

Accepted Answer

The ideal portfolio for an individual investor is one that has the lowest standard deviation (risk) for a given expected rate of return, aligning with the concept of an efficient frontier in portfolio theory.

Question 19

The covariance of two securities is
A)equal to the variance of one security divided by the variance of the second security.
B)zero when the securities are positively related.
C)expressed as a squared value.
D)limited to a range of 0 to +1.
E)unaffected by any changes in the probabilities of various states of the economy occurring.

Accepted Answer

The answer of The covariance of two securities is
A)equal to...

Question 20

A negative covariance between the returns of Stock A and Stock B indicates that
A)market prices of Stock A and Stock B move in tandem when their returns are declining.
B)the return on one stock will exceed that stock's average return when the second stock has a return that is less than its average.
C)a portfolio investing equally in Stocks A and B will have a negative expected rate of return.
D)both Stock A and Stock B have negative rates of return for the period.
E)one stock has a negative rate of return while the other stock has a positive rate of return for the period.

Accepted Answer

A negative covariance indicates that when the return on one stock is above its average, the return on the other stock tends to be below its average, suggesting an inverse relationship in their movements.

Quiz 11: Return and Risk: The Capital Asset Pricing Model Capm

If a stock portfolio is well diversified,then the portfolio variance

Assume two securities are negatively correlated.If these two securities are combined into an equally weighted portfolio,the portfolio standard deviation must be

Angelo anticipates earning a rate of return of 11.4 percent on his portfolio next year.The 11.4 percent is referred to as the

Which statement correctly applies to the feasible set of returns for a portfolio consisting of domestic stocks,A and B? Assume that the expected returns are plotted against standard deviations.

The dominant portfolio with the lowest possible level of risk out of a set of portfolios consisting of two securities is referred to as the

The expected return on a portfolio

Which one of these measures the squared deviations of actual returns from expected returns?

When computing the expected return on a portfolio of stocks the portfolio weights are based on the

The standard deviation of a portfolio will tend to increase when

The correlation between stocks A and B is equal to the

Which one of these statements is correct regarding a portfolio of two risky securities?

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of

You plotted the monthly rate of return for two securities against time for the past 48 months.If the pattern of the movements of these two sets of returns rose and fell together the majority,but not all,of the time,then the securities have

Which one of the following statements is correct concerning the standard deviation of a portfolio?

Which one of these measures the interrelationship between two securities?

If there is no diversification benefit derived from combining two risky stocks into one portfolio,then the

For an individual investor,the ideal portfolio could best be described as the portfolio that

The covariance of two securities is

A negative covariance between the returns of Stock A and Stock B indicates that