Q&A Hero

Q: Which one of the following statements applies to unsystematic risk? A. It can be eliminated through portfolio diversification. B. It is also called market risk. C. It is a type of risk that applies to most, if not all, securities. D. Investors receive a risk premium as compensation for accepting this risk. E. This risk is related to expected returns.

Q: Which one of the following is the best example of systematic risk? A. there is a shortage of nurses B. a fire destroys a warehouse C. gas prices rise sharply D. the cost of sugar increases E. two firms merge their operations

Q: Which one of the following terms is another name for systematic risk? A. unique risk B. firm risk C. market risk D. asset-specific risk E. diversifiable risk

Q: Which one of the following announcements is most apt to cause the price of a firm's stock to increase? A. The firm met its quarterly earnings forecast. B. An unpopular CEO unexpectedly announced he is resigning effective immediately. C. A firm officially confirmed the rumors that it is merging with a competitor. D. The firm just lowered its projected earnings per share for next year. E. Analysts are expected to lower the firm's credit rating on its debt.

Q: Which one of the following is the best example of a risk associated with stock ownership? A. The stock paid a regular quarterly dividend. B. The firm's net income decreased by 4 percent for the quarter, as had been expected. C. One of the firm's patent applications was unexpectedly rejected. D. The firm's cost of debt increased as the result of an expected tax cut. E. The firm's production costs increased in line with previous years.

Q: Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to:A. increase.B. either increase or remain constant.C. remain constant.D. decrease.E. either increase, decrease, or remain constant.

Q: Which one of the following terms is the measure of the tendency of two things to move or vary together? A. variance B. squared deviation C. standard deviation D. alpha E. covariance

Q: Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk? A. reward-to-risk theory B. capital asset pricing model C. risk premium proposal D. market slope hypothesis E. security market line proposition

Q: Which one of the following is expressed as "E(RM) - Rf"? A. market risk premium B. individual security risk premium C. real rate of return D. total expected rate of return E. market rate of return

Q: The security market line depicts the graphical relationship between which two of the following? I. expected return II. surprise return III. systematic risk IV. unsystematic risk A. I and III B. I and IV C. II and III D. II and IV E. none of these

Q: Which one of the following measures systematic risk? A. beta B. alpha C. variance D. standard deviation E. correlation coefficient

Q: According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of risk? A. unsystematic B. firm specific C. expected D. systematic E. diversifiable

Q: Which one of the following is the type of risk that only affects either a single firm or just a small number of firms? A. unexpected B. market C. systematic D. unsystematic E. expected

Q: Which one of the following is the type of risk that affects a large number of assets? A. unique B. systematic C. asset-specific D. unsystematic E. firm-specific

Q: What is the variance of the returns on a security given the following information?A. 239.77B. 284.05C. 321.16D. 347.15E. 362.98

Q: What is the variance of the expected returns on this stock?A. 16.09B. 35.49C. 61.53D. 78.97E. 80.03

Q: What is the variance of the expected returns on this stock?A. 1.21B. 1.42C. 1.56D. 3.84E. 4.03

Q: Tall Stand Timber stock has an expected return of 16.8 percent. What is the risk-free rate if the risk premium on the stock is 12.1 percent? A. 4.70 percent B. 5.30 percent C. 5.67 percent D. 6.55 percent E. 7.17 percent

Q: There is a 30 percent probability that a particular stock will earn a 17 percent return and a 70 percent probability that it will earn 11 percent. What is the risk-free rate if the risk premium on the stock is 8.60 percent? A. 4.20 percent B. 4.80 percent C. 5.20 percent D. 5.40 percent E. 5.80 percent

Q: The risk-free rate is 4.20 percent. What is the expected risk premium on this stock given the following information?A. 5.85 percentB. 6.59 percentC. 8.22 percentD. 10.16 percentE. 11.21 percent

Q: The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the following information?A. 5.88 percentB. 5.95 percentC. 6.10 percentD. 6.23 percentE. 6.27 percent

Q: The risk-free rate is 4.35 percent. What is the expected risk premium on this security given the following information? A. 4.09 percent B. 4.54 percent C. 5.25 percent D. 5.87 percent E. 6.15 percent

Q: What is the expected return on this stock given the following information? A. 6.40 percent B. 6.57 percent C. 8.99 percent D. 13.40 percent E. 14.25 percent

Q: Rosita owns a stock with an overall expected return of 14.40 percent. The economy is expected to either boom or be normal. There is a 52 percent chance the economy will boom. If the economy booms, this stock is expected to return 15 percent. What is the expected return on the stock if the economy is normal? A. 12.00 percent B. 12.83 percent C. 13.15 percent D. 13.75 percent E. 14.40 percent

Q: An investor owns a security that is expected to return 14 percent in a booming economy and 6 percent in a normal economy. The overall expected return on the security is 8.88 percent. Given there are only two states of the economy, what is the probability that the economy will boom? A. 28 percent B. 33 percent C. 36 percent D. 41 percent E. 45 percent

Q: What is the expected return on this stock given the following information? A. 9.36 percent B. 9.74 percent C. 10.85 percent D. 11.78 percent E. 12.05 percent

Q: What is the expected return on this stock given the following information? A. -2.05 percent B. -1.08 percent C. 0.47 percent D. 1.22 percent E. 1.43 percent

Q: What is the expected return on this stock given the following information? A. -8.07 percent B. -7.69 percent C. -6.80 percent D. -5.70 percent E. -5.22 percent

Q: You combine a set of assets using different weights such that you produce the following results. Which one of these portfolios CANNOT be a Markowitz efficient portfolio? A. A B. B C. C D. D E. E

Q: A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities. A. the lowest return for any given level of risk B. the largest number of potential portfolios that can achieve a specific rate of return C. the largest number of potential portfolios that can achieve a specific level of risk D. a positive rate of return and a zero standard deviation E. the lowest risk for any given rate of return

Q: You are graphing the investment opportunity set for a portfolio of two securities with the expected return on the vertical axis and the standard deviation on the horizontal axis. If the correlation coefficient of the two securities is +1, the opportunity set will appear as which one of the following shapes? A. conical shape B. linear with an upward slope C. combination of two straight lines D. hyperbole E. horizontal line

Q: You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph? A. Risk-taking investors should select the minimum variance portfolio. B. Risk-averse investors should select the portfolio with the lowest rate of return. C. Some portfolios will be efficient while others will not. D. The minimum variance portfolio will have the lowest portfolio expected return of any of the possible portfolios. E. All possible portfolios will graph as efficient portfolios.

Q: Which one of the following statements about efficient portfolios is correct? A. Any efficient portfolio will lie below the minimum variance portfolio when the expected portfolio return is plotted against the portfolio standard deviation. B. An efficient portfolio will have the lowest standard deviation of any portfolio consisting of the same two securities. C. There are multiple efficient portfolios that can be constructed using the same two securities. D. Any portfolio mix consisting of only two securities will be an efficient portfolio. E. There is only one efficient portfolio that can be constructed using two securities.

Q: Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero? A. -1.0 B. -0.5 C. 0.0 D. 0.5 E. 1.0

Q: Where does the minimum variance portfolio lie in respect to the investment opportunity set? A. lowest point B. highest point C. most leftward point D. most rightward point E. exact center

Q: Which one of the following distinguishes a minimum variance portfolio? A. lowest risk portfolio of any possible portfolio given the same securities but in differing proportions B. lowest risk portfolio possible given any specified expected rate of return C. the zero risk portfolio created by maximizing the asset allocation mix D. any portfolio with an expected standard deviation of 9 percent or less E. any portfolio created with securities that are evenly weighted in respect to the asset allocation mix

Q: You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds. Which one of the following must be true if you change the asset allocation? A. The expected return will remain constant. B. The revised portfolio will be perfectly negatively correlated with the initial portfolio. C. The two portfolios could have significantly different standard deviations. D. The portfolio variance will be unaffected. E. The portfolio variance will most likely decrease in value.

Q: Which one of the following statements is correct concerning asset allocation? A. Because there is an ideal mix, all investors should use the same asset allocation for their portfolios. B. The minimum variance portfolio will have a 50/50 asset allocation between stocks and bonds. C. Asset allocation affects the expected return but not the risk level of a portfolio. D. There is an ideal asset allocation between stocks and bonds given a specified level of risk. E. Asset allocation should play a minor role in portfolio construction.

Q: A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio? A. 100 percent stocks B. 100 percent bonds C. 50/50 mix of stocks and bonds D. 30 percent stocks and 70 percent bonds E. 30 percent bonds and 70 percent stocks

Q: Which one of the following statements is correct? A. A portfolio variance is a weighted average of the variances of the individual securities which comprise the portfolio. B. A portfolio variance is dependent upon the portfolio's asset allocation. C. A portfolio variance is unaffected by the correlations between the individual securities held in the portfolio. D. The portfolio variance must be greater than the lowest variance of any of the securities held in the portfolio. E. The portfolio variance must be less than the lowest variance of any of the securities held in the portfolio.

Q: Assume the returns on Stock X were positive in January, February, April, July, and November. The other months the returns on Stock X were negative. The returns on Stock Y were positive in January, April, May, July, August, and October and negative the remaining months. Which one of the following correlation coefficients best describes the relationship between Stock X and Stock Y? A. -1.0 B. -0.5 C. 0.0 D. 0.5 E. 1.0

Q: Which one of the following correlation relationships has the potential to completely eliminate risk? A. perfectly positive B. positive C. negative D. perfectly negative E. uncorrelated

Q: If two assets have a zero correlation, their returns will: A. always move in the same direction by the same amount. B. always move in the same direction but not necessarily by the same amount. C. move randomly and independently of each other. D. always move in opposite directions but not necessarily by the same amount. E. always move in opposite directions by the same amount.

Q: How will the returns on two assets react if those returns have a perfect positive correlation? I. move in the same direction II. move in opposite directions III. move by the same amount IV. move by either equal or unequal amounts A. I and III only B. I and IV only C. II and III only D. II and IV only E. III only

Q: What is the correlation coefficient of two assets that are uncorrelated? A. -100 B. -1 C. 0 D. 1 E. 100

Q: To reduce risk as much as possible, you should combine assets which have one of the following correlation relationships? A. strong positive B. slightly positive C. slightly negative D. strongly negative E. zero

Q: Which one of the following correlation coefficients can provide the greatest diversification benefit? A. -1.0 B. -0.5 C. 0.0 D. 0.5 E. 1.0

Q: Non-diversifiable risk: A. can be cut almost in half by simply investing in 10 stocks provided each stock is in a different industry. B. can almost be eliminated by investing in 35 diverse securities. C. remains constant regardless of the number of securities held in a portfolio. D. has little, if any, impact on the actual realized returns for a diversified portfolio. E. should be ignored by investors.

Q: Which one of the following is eliminated, or at least greatly reduced, by increasing the number of individual securities held in a portfolio? A. number of economic states B. various expected returns caused by changing economic states C. market risk D. diversifiable risk E. non-diversifiable risk

Q: As the number of individual stocks in a portfolio increases, the portfolio standard deviation:A. increases at a constant rate.B. remains unchanged.C. decreases at a constant rate.D. decreases at a diminishing rate.E. decreases at an increasing rate.

Q: You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5 percent, regardless of the economic state. Given this, what must be value of the portfolio's variance be? A. negative, but not -1 B. -1.0 C. 0.0 D. 1.0 E. positive, but not +1

Q: Which of the following affect the expected rate of return for a portfolio? I. weight of each security held in the portfolio II. the probability of various economic states occurring III. the variance of each individual security IV. the expected rate of return of each security given each economic state A. I and IV only B. II and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

Q: You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock? A. weighted average return given the multiple states of the economy B. rate of return for a given economic state C. variance of the returns given the multiple states of the economy D. correlation between the returns give the various states of the economy E. correlation of the weighted average return as compared to the market

Q: If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:A. zero.B. the risk-free rate.C. the market rate.D. the market rate minus the risk-free rate.E. the risk-free rate plus one-half the market rate.

Q: Which of the following will increase the expected risk premium for a security, all else constant? I. an increase in the security's expected return II. a decrease in the security's expected return III. an increase in the risk-free rate IV. a decrease in the risk-free rate A. I only B. III only C. IV only D. I and IV only E. II and III only

Q: You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct? A. There is no risk premium on Security C. B. The risk premium on Security A exceeds that of Security B. C. Security B has a risk premium that is 50 percent greater than Security A's risk premium. D. The risk premium on Security C is 5 percent. E. All three securities have the same expected risk premium.

Q: You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy. If the probability of a booming economy decreases, your expected return will:A. decrease.B. either remain constant or decrease.C. remain constant.D. increase.E. either remain constant or increase.

Q: Terry has a portfolio comprised of two individual securities. Which one of the following computations that he might do is NOT a weighted average? A. correlation between the securities B. individual security expected return C. portfolio expected return D. portfolio variance E. portfolio beta

Q: You own a portfolio of 5 stocks and have 3 expected states of the economy. You have twice as much invested in Stock A as you do in Stock E. How will the weights be determined when you compute the rate of return for each economic state? A. The weights will be the probability of occurrence for each economic state. B. Each stock will have a weight of 20 percent for a total of 100 percent. C. The weights will decline steadily from Stock A to Stock E. D. The weights will be based on the amount invested in each stock as a percentage of the total amount invested. E. The weights will be based on a combination of the dollar amounts invested as well as the economic probabilities.

Q: Which one of the following statements must be true? A. All securities are projected to have higher rates of return when the economy booms versus when it is normal. B. Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment. C. The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession. D. The total of the probabilities of the economic states can vary between zero and 100 percent. E. Various economic states affect a portfolio's expected return but not the expected level of risk.

Q: Which of the following are affected by the probability of a state of the economy occurring? I. expected return of an individual security II. expected return of a portfolio III. standard deviation of an individual security IV. standard deviation of a portfolio A. I and III only B. I and II only C. II and IV only D. III and IV only E. I, II, III, and IV

Q: Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation? A. minimum variance portfolio B. Markowitz efficient frontier C. correlated market frontier D. asset allocation relationship E. diversified portfolio line

Q: An efficient portfolio is a portfolio that does which one of the following? A. offers the highest return for the lowest possible cost B. provides an evenly weighted portfolio of diverse assets C. eliminates all risk while providing an expected positive rate of return D. lies on the vertical axis when graphing expected returns against standard deviation E. offers the highest return for a given level of risk

Q: Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets? A. minimum variance set B. financial frontier C. efficient portfolio D. allocated set E. investment opportunity set

Q: The division of a portfolio's dollars among various types of assets is referred to as: A. the minimum variance portfolio. B. the efficient frontier. C. correlation. D. asset allocation. E. setting the investment opportunities.

Q: Correlation is the: A. squared measure of a security's total risk. B. extent to which the returns on two assets move together. C. measurement of the systematic risk contained in an asset. D. daily return on an asset compared to its previous daily return. E. spreading of an investment across a number of assets.

Q: Diversification is investing in a variety of assets with which one of the following as the primary goal? A. increasing returns B. minimizing taxes C. reducing some risks D. eliminating all risks E. increasing the variance

Q: The value of an individual security divided by the portfolio value is referred to as the portfolio: A. beta. B. standard deviation. C. balance. D. weight. E. variance.

Q: A group of stocks and bonds held by an investor is called which one of the following? A. weights B. grouping C. basket D. portfolio E. bundle

Q: What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called? A. efficient return B. correlated value C. risk premium D. expected return E. realized return

Q: Which one of the following returns is the average return you expect to earn in the future on a risky asset? A. realized return B. expected return C. market return D. real return E. adjusted return

Q: Foreign securities are generally considered to be more risky than domestic securities. Given this assumption, explain how adding foreign securities into a domestic portfolio can affect the Markowitz efficient portfolios.

Q: You are advising several individual investors who are interested in investing in portfolios comprised of both stocks and bonds. In preparation for meeting with these various investors, you plot the investment opportunity set for stocks and bonds. Given this information, why might you advise some of the investors to invest in a portfolio other than the minimum variance portfolio?

Q: Explain the primary goal of portfolio diversification as it relates to asset allocation and correlation.

Q: A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent. The correlation of the two funds is .11. What is the weight of the stock fund in the minimum variance portfolio?A. 3.47 percentB. 6.48 percentC. 11.92 percentD. 14.67 percentE. 18.22 percent

Q: A stock fund has a standard deviation of 17 percent and a bond fund has a standard deviation of 8 percent. The correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum variance portfolio?A. 11 percentB. 15 percentC. 21 percentD. 24 percentE. 27 percent

Q: Stock X has a standard deviation of 21 percent per year and stock Y has a standard deviation of 6 percent per year. The correlation between stock A and stock B is .38. You have a portfolio of these two stocks wherein stock X has a portfolio weight of 42 percent. What is your portfolio standard deviation? A. 8.89 percent B. 9.85 percent C. 10.64 percent D. 11.84 percent E. 12.92 percent

Q: Stock A has a standard deviation of 15 percent per year and stock B has a standard deviation of 21 percent per year. The correlation between stock A and stock B is .30. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 60 percent. What is your portfolio standard deviation? A. 14.87 percent B. 15.50 percent C. 16.91 percent D. 17.45 percent E. 18.03 percent

Q: Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance? A. .02022 B. .02156 C. .02239 D. .02247 E. .02350

Q: Stock A has a standard deviation of 15 percent per year and stock B has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .40. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 40 percent. What is your portfolio variance? A. .01143 B. .01214 C. .01329 D. .01437 E. .01470