Q&A Hero

Q: A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is ________. A) .583 B) .225 C) .327 D) .128

Q: The ________ reward-to-variability ratio is found on the ________ capital market line. A) lowest; steepest B) highest; flattest C) highest; steepest D) lowest; flattest

Q: The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier A) I and II only B) II and III only C) III and IV only D) I and IV only

Q: Rational risk-averse investors will always prefer portfolios ________. A) located on the efficient frontier to those located on the capital market line B) located on the capital market line to those located on the efficient frontier C) at or near the minimum-variance point on the risky asset efficient frontier D) that are risk-free to all other asset choices

Q: The term complete portfolio refers to a portfolio consisting of ________. A) the risk-free asset combined with at least one risky asset B) the market portfolio combined with the minimum-variance portfolio C) securities from domestic markets combined with securities from foreign markets D) common stocks combined with bonds

Q: On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the ________ the current investment opportunity set. A) left and above B) left and below C) right and above D) right and below

Q: You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________. A) more than 18% but less than 24% B) equal to 18% C) more than 12% but less than 18% D) equal to 12%

Q: Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ________. A) the returns on the stock and bond portfolios tend to move inversely B) the returns on the stock and bond portfolios tend to vary independently of each other C) the returns on the stock and bond portfolios tend to move together D) the covariance of the stock and bond portfolios will be positive

Q: Harry Markowitz is best known for his Nobel Prize-winning work on ________. A) strategies for active securities trading B) techniques used to identify efficient portfolios of risky assets C) techniques used to measure the systematic risk of securities D) techniques used in valuing securities options

Q: Which one of the following stock return statistics fluctuates the most over time? A) covariance of returns B) variance of returns C) average return D) correlation coefficient

Q: Firm-specific risk is also called ________ and ________. A) systematic risk; diversifiable risk B) systematic risk; nondiversifiable risk C) unique risk; nondiversifiable risk D) unique risk; diversifiable risk

Q: Market risk is also called ________ and ________. A) systematic risk; diversifiable risk B) systematic risk; nondiversifiable risk C) unique risk; nondiversifiable risk D) unique risk; diversifiable risk

Q: Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________. A) equal to the sum of the securities' standard deviations B) equal to -1 C) equal to 0 D) greater than 0

Q: Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A) 2 B) 6 C) 8 D) 20

Q: The risk that can be diversified away is ________. A) beta B) firm-specific risk C) market risk D) systematic risk

Q: Beta is a measure of security responsiveness to ________. A) firm-specific risk B) diversifiable risk C) market risk D) unique risk

Q: The expected rate of return of a portfolio of risky securities is ________. A) the sum of the securities' covariance B) the sum of the securities' variance C) the weighted sum of the securities' expected returns D) the weighted sum of the securities' variance

Q: Diversification is most effective when security returns are ________. A) high B) negatively correlated C) positively correlated D) uncorrelated

Q: The correlation coefficient between two assets equals ________. A) their covariance divided by the product of their variances B) the product of their variances divided by their covariance C) the sum of their expected returns divided by their covariance D) their covariance divided by the product of their standard deviations

Q: Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio? A) .40 B) .50 C) .75 D) .80

Q: Which of the following statistics cannot be negative? A) covariance B) variance C) E(r) D) correlation coefficient

Q: The ________ is the covariance divided by the product of the standard deviations of the returns on each fund. A) covariance B) correlation coefficient C) standard deviation D) reward-to-variability ratio

Q: An investor's degree of risk aversion will determine his or her ________. A) optimal risky portfolio B) risk-free rate C) optimal mix of the risk-free asset and risky asset D) capital allocation line

Q: Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ________ and to the ________. A) up; right B) up; left C) down; right D) down; left

Q: Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ________. A) asset A B) asset B C) no risky asset D) The answer cannot be determined from the data given.

Q: Based on the outcomes in the following table, choose which of the statements below is (are) correct? Scenario Security A Security B Security C Recession Return > E(r) Return = E(r) Return < E(r) Normal Return = E(r) Return = E(r) Return = E(r) Boom Return < E(r) Return = E(r) Return > E(r) I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive. A) I only B) I and II only C) II and III only D) I, II, and III

Q: Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________. A) they had to pay huge fines for obstruction of justice B) their 401k accounts were held outside the company C) their 401k accounts were not well diversified D) none of these options

Q: The ________ decision should take precedence over the ________ decision. A) asset allocation; stock selection B) bond selection; mutual fund selection C) stock selection; asset allocation D) stock selection; mutual fund selection

Q: Risk that can be eliminated through diversification is called ________ risk. A) unique B) firm-specific C) diversifiable D) all of these options

Q: The plot of a security's excess return relative to the market's excess return is called the ________. A) efficient frontier B) security characteristic line C) capital allocation line D) capital market line

Q: Lear Corp. has an expected excess return of 8% next year. Assume Lear's beta is 1.43. If the economy booms and the stock market beats expectations by 5%, what was Lear's actual excess return? A) 7.15% B) 13% C) 15.15% D) 18.59 %

Q: The portfolio with the lowest standard deviation for any risk premium is called the_______. A) CAL portfolio B) efficient frontier portfolio C) global minimum variance portfolio D) optimal risky portfolio

Q: The efficient frontier represents a set of portfolios that A) maximize expected return for a given level of risk. B) minimize expected return for a given level of risk. C) maximize risk for a given level of return. D) None of the options.

Q: The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks? A) Stock A is riskier. B) Stock B is riskier. C) Both stocks are equally risky. D) The answer cannot be determined from the information given.

Q: The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock? A) Stock A B) Stock B C) There is no difference between A or B. D) The answer cannot be determined from the information given.

Q: The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio? A) 0 B) .45 C) .74 D) 1.35

Q: What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1. A) 0% B) 10.8% C) 18% D) 24%

Q: What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23. A) 9.7% B) 12.2% C) 14% D) 15.6%

Q: Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive? A) σ2rp < (W12σ12 + W22σ22) B) σ2rp = (W12σ12 + W22σ22) C) σ2rp = (W12σ12 - W22σ22) D) σ2rp > (W12σ12 + W22σ22)

Q: You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A) I only B) I and II only C) I and III only D) I, II, and III

Q: As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall. A) I only B) I and II only C) III only D) I, II, and III

Q: A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called ________. A) firm-specific risk B) systematic risk C) unique risk D) none of the options

Q: Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A) market risk B) unique risk C) unsystematic risk D) none of these options (With a correlation of 1, no risk will be reduced.)

Q: Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A) market risk B) nondiversifiable risk C) systematic risk D) unique risk

Q: What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A) -1 B) 0 C) 1 D) .5

Q: Which of the following correlation coefficients will produce the most diversification benefits? A) -.6 B) -.9 C) 0 D) .4

Q: Which of the following correlation coefficients will produce the least diversification benefit? A) -.6 B) -.3 C) 0 D) .8

Q: If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ________. A) calculate two covariances and one trivariance B) calculate only two covariances C) calculate three covariances D) average the variances of the individual stocks

Q: Your great aunt Zella invested $100 in 1925 in a portfolio of large U.S. stocks that earned a compound return of 10% annually.If she left that money to you, how much would be in the account 92 years later in 2017? A) $1,000 B) $9,900 C) $642,875.74 D) $5,843,325

Q: What is the VaR of a $10 million portfolio with normally distributed returns at the 5% VaR? Assume the expected return is 13% and the standard deviation is 20%. A) 13% B) -13% C) 19.90% D) -19.90%

Q: Which measure of downside risk predicts the worst loss that will be suffered with a given probability? A) standard deviation B) variance C) value at risk D) Sharpe ratio

Q: The normal distribution is completely described by its ________. A) mean and standard deviation B) mean C) mode and standard deviation D) median and variance

Q: If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A) 5% B) 15% C) 54.5% D) 114.5%

Q: You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year Beginning of Year Price # of Shares Bought or Sold 2014 $ 50.00 100 bought 2015 $ 55.00 50 bought 2016 $ 51.00 75 sold 2017 $ 54.00 75 sold What is the dollar-weighted return over the entire time period? A) 2.87% B) .74% C) 2.6% D) 2.21%

Q: Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons. A) I only B) I and II only C) II and III only D) I, II, and III

Q: The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ________. A) SML B) CAPM C) CML D) total return line

Q: A loan for a new car costs the borrower .8% per month. What is the EAR? A) .80% B) 6.87% C) 9.6% D) 10.03%

Q: The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan? A) .50% B) 5% C) 6% D) 6.5%

Q: According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return? A) long-term Treasury bonds B) corporate bonds C) common stocks D) preferred stocks

Q: If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment? A) 3.92% B) 4% C) 4.12% D) 6%

Q: What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%? A) 8% B) 8.33 % C) 8.47% D) 8.5 %

Q: Which one of the following would be considered a risk-free asset in real terms as opposed to nominal? A) money market fund B) U.S. T-bill C) short-term corporate bonds D) U.S. T-bill whose return was indexed to inflation

Q: You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero. A) I only B) I and III only C) II only D) I, II, and III

Q: The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year? A) 6.58% B) 8.86% C) 14.47% D) 18.66%

Q: The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year? A) -3.64% B) -6.36% C) -6.44% D) -11.74%

Q: From 1926 to 2013 the world stock portfolio offered ________ return and ________ volatility than the portfolio of large U.S. stocks. A) lower; higher B) lower; lower C) higher; lower D) higher; higher

Q: The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund? A) .8 B) .6 C) 9 D) 1

Q: A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is ________. A) 68.26% B) 95.44% C) 99.74% D) 100%

Q: You have the following rates of return for a risky portfolio for several recent years: 2013 35.23% 2014 18.67% 2015 −9.87% 2016 23.45% The annualized (geometric) average return on this investment is ________. A) 16.15% B) 16.87% C) 21.32% D) 15.60%

Q: You have the following rates of return for a risky portfolio for several recent years: 2013 35.23% 2014 18.67% 2015 −9.87% 2016 23.45% If you invested $1,000 at the beginning of 2013, your investment at the end of 2016 would be worth ________. A) $2,176.60 B) $1,785.56 C) $1,645.53 D) $1,247.87

Q: You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be ________, ________, and ________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%. A) $162; $595; $243 B) $243; $162; $595 C) $595; $162; $243 D) $595; $243; $162

Q: You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be ________ and ________. A) $300; $450 B) $150; $100 C) $100; $150 D) $450; $300

Q: You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately ________ in the risky portfolio. This will mean you will also invest approximately ________ and ________ of your complete portfolio in security X and Y, respectively. A) 0%; 60%; 40% B) 25%; 45%; 30% C) 40%; 24%; 16% D) 50%; 30%; 20%

Q: You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest ________ of your complete portfolio in Treasury bills. A) 19% B) 25% C) 36% D) 50%

Q: The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is ________. A) 6% B) 8.75 % C) 10% D) 16.25%

Q: You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should ________. A) invest $125,000 in the risk-free asset B) invest $375,000 in the risk-free asset C) borrow $125,000 D) borrow $375,000

Q: You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately ________. A) 1.040 B) .80 C) .50 D) .25

Q: You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you ________. A) place 40% of your money in the risky portfolio and the rest in the risk-free asset B) place 55% of your money in the risky portfolio and the rest in the risk-free asset C) place 60% of your money in the risky portfolio and the rest in the risk-free asset D) place 75% of your money in the risky portfolio and the rest in the risk-free asset

Q: You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. ________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%. A) 100% B) 90% C) 45% D) 10%

Q: You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%? A) $6,000 B) $4,000 C) $7,000 D) $3,000