Question 1

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What is the capitalization of the market portfolio?

Accepted Answer

Capitalization of the market portfolio is calculated by multiplying the number of outstanding shares (in this case, 2000 shares each for stocks A and B) by their respective share prices and then taking the sum of the two.

Capitalization of stock A = 2000 shares x $20/share = $40,000 
Capitalization of stock B = 2000 shares x $10/share = $20,000 
Total market capitalization = $40,000 + $20,000 = $60,000

Therefore, the correct answer is (B) $60,000.

Question 2

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What proportion of the market portfolio is comprised of stock A?

Accepted Answer

To find the proportion of the market portfolio that is comprised of stock A, we need to calculate the market value of stock A and stock B, and then divide the market value of stock A by the total market value of the portfolio. The market value of stock A is: 
5000 shares x $20/share = $100,000 
The market value of stock B is:
2000 shares x $35/share = $70,000 
The total market value of the portfolio is:
$100,000 + $70,000 = $170,000 
So the proportion of the market portfolio that is comprised of stock A is:
$100,000 / $170,000 = 0.588, which is approximately 58.8%. Therefore, the correct answer is A) 58.8%.

Question 3

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What is the capitalization of the market portfolio?

Accepted Answer

The capitalization of the market portfolio is the total value of all the shares in the market. In this case, the capitalization of the market portfolio is:5000 shares of stock A * $20 per share = $100,0002000 shares of stock B * $35 per share = $70,000Total capitalization = $100,000 + $70,000 = $170,000

Question 4

Use the table for the question(s)below.
Consider the following returns:
 
-The covariance between Lowes' and Home Depot's returns is closest to:

Accepted Answer

11ea7fd1_1f8f_7857_99dd_397b2f1d7477_TB1622_00

Question 5

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-Which of the following combinations of two stocks would give you the biggest reduction in risk?

Accepted Answer

To determine the biggest reduction in risk, we need to look for the combination that has the highest negative correlation. From the table, we can see that the correlation between Microsoft and Duke Energy is -0.5, which is the lowest correlation among all the pairs. Therefore, choosing Microsoft and Duke Energy would provide the biggest reduction in risk.

Question 6

Which of the following statements is FALSE?

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 7

Which of the following equations is INCORRECT?

Accepted Answer

The correlation coefficient always lies between -1 and 1, so the value given in option C, "11ea7fd1_1f8f_5145_99dd_49899215542e_TB1622_11," which is not within this range, is incorrect.

Question 8

Which of the following statements is FALSE?

Accepted Answer

Correlation is the standardized measure of the linear relationship between two variables, not the expected product of their deviations.

Question 9

Which of the following statements is FALSE?

Accepted Answer

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

Question 10

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

Accepted Answer

The answer of What diversification,if any,is achieved if two stocks...

Question 11

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What proportion of the market portfolio is comprised of each stock?

Accepted Answer

To find the proportion of each stock in the market portfolio, we need to calculate the total value of both stocks first. 
Total value of stock A = $20 x 2000 = $40,000 
Total value of stock B = $10 x 2000 = $20,000 
Total market value = $40,000 + $20,000 = $60,000 
Proportion of stock A = ($40,000 / $60,000) x 100 = 66.7% 
Proportion of stock B = ($20,000 / $60,000) x 100 = 33.3% 
Therefore, the best choice is A, where Stock A is 66.7% and Stock B is 33.3%.

Question 12

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Accepted Answer

The volatility of an equally weighted portfolio can be calculated using the formula:

Portfolio volatility = √(w1^2 x σ1^2 + w2^2 x σ2^2 + 2 x w1 x w2 x σ1 x σ2 x ρ)

where w1 and w2 are the weights of the two securities, σ1 and σ2 are their respective volatilities, and ρ is the correlation between them.

Plugging in the values from the table:

Portfolio volatility = √(0.5^2 x 0.13^2 + 0.5^2 x 0.21^2 + 2 x 0.5 x 0.5 x 0.23 x 0.44)

Portfolio volatility = √(0.0085 + 0.0232 + 0.0202) = 0.121 or 12.1%

Therefore, the closest option is B) 9%.

Question 13

Which of the following statements is FALSE?

Accepted Answer

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

Question 14

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Accepted Answer

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

Question 15

Use the table for the question(s)below.
Consider the following returns:
 
-The volatility on Lowes' returns is closest to:

Accepted Answer

11ea7fd1_1f8f_9f68_99dd_09bd4b09ee50_TB1622_00

Question 16

Which of the following statements is FALSE?

Accepted Answer

The statement "Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together" is incorrect. In reality, most stock correlations are positive, which means that stocks tend to move together rather than in opposite directions.

Question 17

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

Accepted Answer

The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy can be calculated as follows:

Portfolio volatility = sqrt((0.5^2)*(0.11^2)+(0.5^2)*(0.14^2)+2*(0.5)*(0.5)*(0.11)*(0.14)*(0.35))
                    = 0.076 or 7.6%

Therefore, the closest option is C) 7.6%.

Question 18

If you build a large enough portfolio,you can diversify away all the risks of a portfolio.

Accepted Answer

Diversification can reduce the specific risk of individual assets, but it cannot eliminate systematic risks such as market or economic risks that impact entire portfolios. Therefore, even with a large portfolio, some level of risk will always be present.

Question 19

Use the table for the question(s)below.
Consider the following returns:
 
-The volatility on Home Depot's returns is closest to:

Accepted Answer

11ea7fd1_1f8f_c679_99dd_31f1d68921e7_TB1622_00

Question 20

What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

Accepted Answer

The answer of What is the lowest risk possible by...

Quiz 12: Systematic Risk and the Equity Risk Premium

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What is the capitalization of the market portfolio?

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What proportion of the market portfolio is comprised of stock A?

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What is the capitalization of the market portfolio?

Use the table for the question(s) below. Consider the following returns: -The covariance between Lowes' and Home Depot's returns is closest to:

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -Which of the following combinations of two stocks would give you the biggest reduction in risk?

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What proportion of the market portfolio is comprised of each stock?

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Which of the following statements is FALSE?

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

Use the table for the question(s) below. Consider the following returns: -The volatility on Lowes' returns is closest to:

Which of the following statements is FALSE?

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

If you build a large enough portfolio,you can diversify away all the risks of a portfolio.

Use the table for the question(s) below. Consider the following returns: -The volatility on Home Depot's returns is closest to:

What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?