Question 1

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
 
-What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

Accepted Answer

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

Question 2

A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share prices for stocks A and B are $25 and $15, respectively. What proportion of the market portfolio is comprised of each stock?

Accepted Answer

A) Multiply the number of shares of each stock by its price and add the values.
Thus, (2100 × $25) + (2100 × $15) = $84,000.
Stock A is $52,500 / $84,000 = 62.5% and Stock B is $31,500 / $84,000 = 37.5%

Question 3

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 4

Consider the following returns:  The covariance between Lowes' and Home Depot's returns is closest to ________.

Accepted Answer

A)
 11ea84dc_f533_8fc9_9a63_d7fed9e62c53_TB1316_00_TB1316_00

Question 5

Which of the following equations is INCORRECT?

Accepted Answer

C) Corr(R_i,R_j) = 11ea84dc_f533_68b7_9a63_d15c840cd8ed_TB1316_11_TB1316_11

Question 6

A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the market portfolio?

Accepted Answer

B) Multiply the number of shares of each stock by its price and add the values.
Thus, (2400 × $15) + (2400 × $5) = $48,000.

Question 7

Which of the following statements is FALSE?

Accepted Answer

The magnitude of a correlation coefficient, which ranges from -1 to 1, provides a measure of the strength of the relationship between two variables, making it interpretable.

Question 8

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

B) 11ea84dc_f534_04ff_9a63_65930226d866_TB1316_00_TB1316_00 11ea84dc_f534_0500_9a63_a7dfc4bca8e1_TB1316_00_TB1316_00 = 0.0081
stdev = 11ea84dc_f534_2c11_9a63_391d371c779f_TB1316_11_TB1316_11 = 0.09

Question 9

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
 
-What diversification, if any, is achieved if two stocks in a portfolio are perfectly positively correlated?

Accepted Answer

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

Question 10

A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30, respectively. What proportion of the market portfolio is comprised of stock A?

Accepted Answer

A) Multiply the number of shares of each stock by its price and add the values.
Thus, (4700 × $25) + (2300 × $30) = $186,500.
Stock A is worth 4700 × $25 = $117,500;
$117,500 / $186,500 = 63.0%

Question 11

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

C) Var(R_p) = w₁²^SD(R₁) + w₂²^SD(R₂) + 2X₁X₂Corr(R₁,R₂)SD₁SD₂ ₌0.5²(0.12)² + 0.5²(0.06)² + 2(0.5)(0.5)(0)(0.12)(0.06) = 0.0045 stdev = 11ea84dc_f534_7a35_9a63_45b53664afbc_TB1316_11_TB1316_11 = 0.06708204

Question 12

Consider the following returns:  The volatility on Home Depot's returns is closest to ________.

Accepted Answer

C)
 11ea84dc_f533_dded_9a63_7dc86eec1e6e_TB1316_00_TB1316_00

Question 13

A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35, respectively. What is the capitalization of the market portfolio?

Accepted Answer

A) Multiply the number of shares of each stock by its price and add the values.
Thus, ( 11ea84dc_f534_ef67_9a63_afd7388b2ea5_TB1316_11_TB1316_11

Question 14

Which of the following statements is FALSE?

Accepted Answer

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

Question 15

Consider the following returns:  The volatility on Lowes' returns is closest to ________.

Accepted Answer

A)
 11ea84dc_f533_b6db_9a63_55a64a8109a8_TB1316_00_TB1316_00

Question 16

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 17

Which of the following statements is FALSE?

Accepted Answer

D) The variance of a portfolio depends on the variance and correlations of the individual stocks.

Question 18

Which of the following statements is FALSE?

Accepted Answer

C) Almost all of the correlations between stocks are positive, illustrating the general tendency of stocks to move together.

Question 19

Which of the following statements is FALSE?

Accepted Answer

Correlation is the measure of the linear relationship between two variables and is a standardized version of covariance. The formula for correlation involves dividing the covariance by the product of the standard deviations of the two variables. It is not the expected product of the deviations of two returns.

Question 20

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

C) 11ea84dc_f534_5323_9a63_5dfd8c4f6b79_TB1316_00_TB1316_00

Quiz 12: Systematic Risk and the Equity Risk Premium

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share prices for stocks A and B are $25 and $15, 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: -Which of the following combinations of two stocks would give you the biggest reduction in risk?

Consider the following returns: The covariance between Lowes' and Home Depot's returns is closest to ________.

Which of the following equations is INCORRECT?

A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the market portfolio?

Which of the following statements is FALSE?

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 ________.

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -What diversification, if any, is achieved if two stocks in a portfolio are perfectly positively correlated?

A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30, respectively. What proportion of the market portfolio is comprised of stock A?

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 ________.

Consider the following returns: The volatility on Home Depot's returns is closest to ________.

A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35, respectively. What is the capitalization of the market portfolio?

Which of the following statements is FALSE?

Consider the following returns: The volatility on Lowes' returns is closest to ________.

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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 ________.