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Investments & Securities
Q:
Which of the following would not be considered a source of systematic risk?
a. a hostile takeover
b. a rise in inflation
c. a fall in GDP
d. a panic on Wall Street
Q:
Systematic risk is also called:
a. diversifiable risk
b. market risk
c. random risk
d. company-specific risk
Q:
Based on recent history, an investor would probably have a lower risk level with a portfolio consisting of:
a. all stocks
b. all bonds
c. some stocks and some bonds
d. Impossible to tell
Q:
Which of the following statements is true regarding TIPS?
a. As inflation changes, the interest rate on the bond is adjusted
b. The correlation between TIPS and the S&P 500 Index has often been negative
c. TIPS are more volatile than regular Treasury bonds of similar maturity
d. TIPS always pay a premium over inflation
Q:
The only asset class to provide systematic protection against inflation is:
a. bonds
b. real estate
c. foreign stocks
d. TIPS
Q:
Because of increasing correlation between U.S. markets and foreign markets, most professional investors now recommend:
a. zero exposure to foreign markets for the foreseeable future
b. replacing foreign stock exposure with U.S. Treasury bonds
c. maintaining some reasonable exposure to foreign markets
d. replacing foreign stock exposure with sovereign debt from investment grade countries.
Q:
Asset allocation is one of the most widely used applications of:
a. the Capital Asset Pricing Model.
b. random diversification.
c. passive portfolio approach.
d. modern portfolio theory.
Q:
To implement the single-index model, estimates of the _______for each stock are needed.
a. expected return
b. standard deviation
c. beta
d. covariance
Q:
Under the Multi-Index Model, the industry relationship to stock prices would be assessed by the:
a. market factor
b. nonmarket factor
c. beta
d. unique part
Q:
The single-index model implies stocks covary only because of their common:
a. currency
b. relationship to each other
c. relationship to the market
d. desire to make a profit
Q:
With the Single-index model, the difference between actual return and expected return given a particular market index is referred to as the:
a. parameter
b. unique part
c. error term
c. beta
Q:
Choose the portfolio from the following set that is not on the efficient frontier.
a. A: expected return of 10 percent; standard deviation of 8 percent
b. B: expected return of 18 percent; standard deviation of 13 percent
c. C: expected return of 38 percent; standard deviation of 38 percent
d. D: expected return of 15 percent; standard deviation of 14 percent
Q:
As a measure of market risk, the beta for the S&P 500 is generally considered to be: a. -1.0b. 1.0c. 0d. impossible to determine
Q:
The single index model divides a security's return into _______ and ________ parts.
a. supply; demand
b. control; non-control
c. company-related; industry-related
d. micro; macro
Q:
Which of the following is true regarding the Markowitz Model as covered in this chapter?
a. It fully addresses the use of leverage
b. Investors must have homogeneous expectations about model parameters
c. Investors must be better off if they invest in portfolios to the Northwest of the efficient frontier
d. Markowitz diversification is inefficient diversification
Q:
Which of the following is not true regarding the Markowitz theory?
a. Markowitz portfolio theory is considered a three-parameter model
b. Under the Markowitz model, no portfolio on the efficient frontier dominates any other portfolio on the efficient frontier
c. The Markowitz model is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks
d. Markowitz portfolio theory is a multi-period model generates an entire set, or efficient frontier, of portfolios
Q:
Different investors will estimate the inputs to the Markowitz model differently because:
a. every investor has his/her own risk/return preferences
b. every investor has access to different information about securities
c. there is an inherent uncertainty in security analysis
d. there is a random selection process used by individual investors
Q:
The benefits of international diversification have ________since 1995.
a. increased
b. decreased
c. disappeared
d. become more volatile
Q:
Indifference curves:
a. always curve to the left
b. have a positive slope
c. cannot intersect
d. are convex
Q:
The optimal portfolio is the efficient portfolio with the
a. lowest risk
b. highest risk
c. highest utility
d. least investment
Q:
A portfolio which lies below the efficient frontier is described as
a. optimal
b. unattainable
c. dominant
d. dominated
Q:
Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by
a. aggressive investors
b. conservative investors
c. risk-averse investors
d. defensive investors
Q:
According to Markowitz, an efficient portfolio is one that has the
a. largest expected return for the smallest level of risk
b. largest expected return and zero risk
c. largest expected return for a given level of risk
d. smallest level of risk
Q:
Indifference curves reflect -------------- while the efficient set of portfolios represent ---------------.
a. portfolio possibilities; investor preferences.
b. investor preferences; portfolio possibilities.
c. portfolio return; investor risk.
d. investor preferences; portfolio return.
Q:
The optimal portfolio for a risk-averse investor:
a. cannot be determined
b. occurs at the point of tangency between the highest indifference curve and the highest expected return
c. occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios
d. occurs at the point of tangency between the highest expected return and lowest risk efficient portfolios
Q:
Which of the following statements regarding indifference curves is not
true?
a. Investors have a finite number of indifference curves
b. The greater the slope of the indifference curve, the greater the risk aversion of investors
c. The indifference curves for all risk-averse investors will be upward sloping
d. Indifference curves cannot intersect
Q:
An indifference curve shows:
a. the one most desirable portfolio for a particular investor
b. all combinations of portfolios that are equally desirable to a particular investor
c. all combinations of portfolios that are equally desirable to all investors
d. the one most desirable portfolio for all investors
Q:
When the Markowitz model assumes that most investors are considered to be 'risk averse', this really means that they:
a. will not take a 'fair gamble'
b. will take a 'fair gamble'
c. will take a 'fair gamble' fifty percent of the time
d. will never assume investment risk
Q:
Which of the following is not one of the assumptions of portfolio theory?
a. Liquidity of positions
b. Investor preferences are based only on expected return and risk
c. Low transactions costs
d. A single investment period
Q:
Under the Markowitz model, investors:
a. are assumed to be risk-seekers
b. are not allowed to use leverage
c. are assumed to be institutional investors
d. are always better off if they select portfolios consisting of multiple securities
Q:
According to Markowitz, rational investors will seek efficient portfolios because these portfolios are optimal based on:
a. expected return.
b. risk.
c. expected return and risk.
d. transactions costs.
Q:
Calculate the expected return and risk (standard deviation) for General Fudge for 200X, given the following information: Probabilities 0.20 0.15 0.50 0.15 Possible Outcomes 20% 15% 11% -5%
Q:
Why is more Difficult to put Markowitz diversification into effect than random diversification?
Q:
Conventional wisdom has long held that diversification of a stock portfolio should be across industries. Does the correlation coefficient indirectly recommend the same thing?
Q:
The number of covariances in the Markowitz model is ________ ; the number of unique covariances is [n (n-1)]/2.
Q:
The major problem with Markowitz diversification model is that it requires a full set of ________________________ between the returns of all securities being considered in order to calculate portfolio variance.
Q:
An efficiently diversified portfolio still has _____________________ risk.
Q:
Markowitz diversification, also called _____________ diversification, removes _________________ risk from the portfolio.
Q:
A portfolio consisting of two securities with perfect negative correlation in the proper proportions can be shown to have a standard deviation of zero. What makes this riskless portfolio impossible to achieve in the real world?
Q:
Provide an example of two industries that might have low correlation with one another. Give an example that might exhibit high correlation.
Q:
Why was the Markowitz model impractical for commercial use when it was first introduced in 1952? What has changed by the 1990s?
Q:
How is the correlation coefficient important in choosing among securities for a portfolio?
Q:
Are the expected returns and standard deviation of a portfolio both weighted averages of the individual securities expected returns and standard deviations? If not, what other factors are required?
Q:
In a portfolio consisting of two perfectly negatively correlated securities, the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.
Q:
The correlation coefficient explains the cause in the relative movement in returns between two securities.
Q:
In the case of a four-security portfolio, there will be 8 covariances.
Q:
If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model, the assumption is that past relationships will continue in the future.
Q:
Portfolio risk can be reduced by reducing portfolio weights for assets with positive correlations.
Q:
Throwing a dart at the WSJ and selecting stocks on this basis would be considered random diversification.
Q:
According to the Law of Large Numbers, the larger the sample size, the more likely it is that the sample mean will be close to the population expected value.
Q:
Investments in commodities such as precious metals may provide additional
diversification opportunities for portfolios consisting primarily of stocks and bonds.
Q:
A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.
Q:
Portfolio risk is a weighted average of the individual security risks.
Q:
A probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes.
Q:
Standard deviations for well-diversified portfolios are reasonably steady over time.
Q:
With a discrete probability distribution:
a. a probability is assigned to each possible outcome
b. possible outcomes are constantly changing
c. an infinite number of possible outcomes exist
d. there is no variance
Q:
The major problem with the Markowitz model is its:lack of accuracypredictability flawscomplexityinability to handle large number of inputs
Q:
Calculate the risk (standard deviation) of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5. Variance Weight (in the portfolio) Security A 10 0.3 Security B 20 0.7 a. 17.0 percent b. 5.4 percent c. 2.0 percent d. 3.7 percent
Q:
When the covariance is positive, the correlation will be:
a. positive
b. negative
c. zero
d. impossible to determine
Q:
Owning two securities instead of one will not reduce the risk taken by an investor if the two securities are
a. perfectly positively correlated with each other
b. perfectly independent of each other
c. perfectly negatively correlated with each other
d. of the same category, e.g. blue chips
Q:
Markowitz's main contribution to portfolio theory is:
a. that risk is the same for each type of financial asset
b. that risk is a function of credit, liquidity and market
factors
c. risk is not quantifiable
d. insight about the relative importance of variance and covariance in determining portfolio risk
Q:
A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in
a. both the expected return and the risk of the portfolio
b. only the expected return of the portfolio
c. only the risk level of the portfolio
d. neither the expected return nor the risk level of the portfolio
Q:
Portfolio risk is most often measured by professional investors using the:expected valueportfolio betaweighted average of individual riskstandard deviation
Q:
When returns are perfectly positively correlated, the risk of the portfolio is:zerothe weighted average of the individual securities riskequal to the correlation coefficient between the securitiesinfinite
Q:
The major difference between the correlation coefficient and the covariance is that:the correlation coefficient can be positive, negative or zero while the covariance is always positivethe correlation coefficient measures relationship between securities and the covariance measures relationships between a security and the marketthe correlation coefficient is a relative measure showing association between security returns and the covariance is an absolute measure showing association between security returnsthe correlation coefficient is a geometric measure and the covariance is a statistical measure
Q:
Which of the following statements regarding portfolio risk and number of stocks is generally true?Adding more stocks increases riskAdding more stocks decreases risk but does not eliminate itAdding more stocks has no effect on riskAdding more stocks increases only systematic risk
Q:
Which of the following portfolios has the least reduction of risk?A portfolio with securities all having positive correlation with each otherA portfolio with securities all having zero correlation with each otherA portfolio with securities all having negative correlation with each otherA portfolio with securities all having skewed correlation with each other
Q:
Security A and Security B have a correlation coefficient of 0. If Security A's return is expected to increase by 10 percent,Security B's return should also increase by 10 percentSecurity B's return should decrease by 10 percentSecurity B's return should be zeroSecurity B's return is impossible to determine from the above information
Q:
Two stocks with perfect negative correlation will have a correlation coefficient of:+1.0-2.00-1.0
Q:
Which of the following statements regarding the correlation coefficient is not true?It is a statistical measureIt measure the relationship between two securities' returnsIt determines the causes of the relationship between two securities' returnsIt is greater than or equal to -1 and less than or equal to +1
Q:
The relevant risk for a well-diversified portfolio is:
a. interest rate risk
b. inflation risk
c. business risk
d. market risk
Q:
Company specific risk is also known as:
a. market risk
b. systematic risk
c. non-diversifiable risk
d. idiosyncratic risk
Q:
Which of the following is true regarding random diversification?
a. Investment characteristics are considered important in random diversification
b. The benefits of random diversification eventually no longer continue as more securities are added
c. Random diversification, if done correctly, can eliminate all risk in a portfolio
d. Random diversification eventually removes all company specific risk from a portfolio
Q:
Which of the following is true regarding the expected return of a portfolio?
a. It is a weighted average only for stock portfolios
b. It can only be positive
c. It can never be above the highest individual asset return
d. It is always below the highest individual asset return
Q:
In order to determine the expected return of a portfolio, all of the following must be known, except:probabilities of expected returns of individual assetsweight of each individual asset to total portfolio valueexpected return of each individual assetvariance of return of each individual asset and correlation of returns between assets
Q:
Which of the following statements regarding expected return of a portfolio is true?It can be higher than the weighted average expected return of individual assetsIt can be lower than the weighted average return of the individual assetsIt can never be higher or lower than the weighted average expected return of individual assetsExpected return of a portfolio is impossible to calculate
Q:
Portfolio weights are found by:
a. dividing standard deviation by expected value
b. calculating the percentage each asset's value to the total portfolio value
c. calculating the return of each asset to total portfolio return
d. dividing expected value by the standard deviation
Q:
The bell-shaped curve, or normal distribution, is considered:discrete.downward slopinglinearcontinuous
Q:
Probability distributions:are always discrete.are always continuous.can be either discrete or continuous.are inverse to interest rates.
Q:
Given the following probability distribution, calculate the expected return of security XYZ. Security XYZ's Potential return Probability 20% 0.3 30% 0.2 -40% 0.1 50% 0.1 10% 0.3 a. 16 percent b. 22 percent c. 25 percent d. 18 percent