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### According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

### Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

up, left

### 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 ______.

asset A

### 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?

20-10 / 25 = .40 = 40%

###
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

I and II only

###
Based on the outcomes in the table below choose which of the statements is/are correct:

I. The covariance of Security A and Security B is zero

II. The correlation coefficient between Security A and C is negative

III. The correlation coefficient between Security B and C is positive

I and II only

### The characteristic line for this stock is Rstock = ___ + ___ Rmarket.

4.05, 1.32

Intercept equals 4.05 and slope equals 1.32.

### 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 _________.

equal to 0

### Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum variance portfolio is _________.

40%

### The correlation coefficient between two assets equals to _________.

their covariance divided by the product of their standard deviations

### The _______ decision should take precedence over the _____ decision.

asset allocation, stock selection

### Decreasing the number of stocks in a portfolio from 50 to 10 would likely _________________________.

increase the unsystematic risk of the portfolio

### The expected rate of return of a portfolio of risky securities is _________.

the weighted sum of the securities' expected returns

### The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standard deviation is 12.0%, what is the reward to variability ratio of the portfolio?

0.45

Reward to variability ratio = (.089 - .035)/.12 = 0.45

### Harry Markowitz is best known for his Nobel prize winning work on _____________.

techniques used to identify efficient portfolios of risky assets

### If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the ________.

stock's standard deviation

### If you want to know the portfolio standard deviation for a three stock portfolio you will have to

calculate three covariances

### In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

-1.0

### Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?

Unique risk

### Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?

With a correlation of 1.0, no risk will be reduced

###
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%.

The proportion of the optimal risky portfolio that should be invested in stock A is _________.

0%

###
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%.

The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

71%

### An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is _________.

12%

### An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The expected return on stock A is 20% while on stock B it is 10%. The correlation coefficient between the return on A and B is 0%. The expected return on the minimum variance portfolio is approximately _________.

13.60%

### An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24% while the standard deviation on stock B is 14%. The correlation coefficient between the return on A and B is 0.35. The expected return on stock A is 25% while on stock B it is 11%. The proportion of the minimum variance portfolio that would be invested in stock B is approximately _________.

85%

### An investor's degree of risk aversion will determine his or her ______.

optimal mix of the risk-free asset and risky asset

### The ________ is equal to the square root of the systematic variance divided by the total variance.

correlation coefficient

### Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ___.

their 401k accounts were not well diversified

### The market value weighted average beta of firms included in the market index will always be _____________.

1

### On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.

left and above

###
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 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

III and IV only

###
The part of a stock's return that is systematic is a function of which of the following variables?

I. Volatility in excess returns of the stock market

II. The sensitivity of the stock's returns to changes in the stock market

III. The variance in the stock's returns that is unrelated to the overall stock market

I and II only

### ____ percent of the variance is explained by this regression.

12

R2 = 12 means 12% of the variance is explained by the regression.

### 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. 0.583

0.0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ; = 0.583

### A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

19.76%

2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45)

2p = .039046

p = 19.76%

### A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called __________.

systematic risk

### A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half your money. What is the expected return on this investment project?

25%

E[rp] = (.5)(100) + (.5)(-50) = 25%

### A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your money. What is the standard deviation of this investment?

73%

### Rational risk-averse investors will always prefer portfolios _____________.

located on the capital market line to those located on the efficient frontier

### Risk that can be eliminated through diversification is called ______ risk.

A. unique

B. firm-specific

C. diversifiable

D. all of the above

### A security's beta coefficient will be negative if ____________.

its returns are negatively correlated with market index returns

### Semitool Corp has an expected excess return of 6% for next year. However for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information what was Semitool's actual excess return?

8.80%

6% + (1.5%)(1.2) + 1% = 8.8%

### Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.

less than 1

### The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.

Covariance = -.50(.10)(.04)= -.0020

### The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.

correlation = .0030 / .10(.05) = .60

### The standard deviation of the returns on the optimal risky portfolio is _________.

21.4%

2rp = (.292)(.392) + (.712)(.202) + 2(.29)(.71)(.39)(.20).4

2rp = .045804

rp = 21.4%

### Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitive to changes in the market as the returns of Stock B.

20% more

### A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% and the standard deviation of the stock is 35%. What is the stock's beta?

0.75

### The stock is ______ riskier than the typical stock.

32%

Beta of 1.32 means that this stock is 32% riskier than the market.

### Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

the returns on the stock and bond portfolio tend to vary independently of each other

### The term "complete portfolio" refers to a portfolio consisting of _________________.

the risk-free asset combined with at least one risky asset

### The term excess-return refers to ______________.

the difference between the rate of return earned and the risk-free rate

### To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by _________.

n/(n - 1)

### The values of beta coefficients of securities are __________.

usually positive, but are not restricted in any particular way

### What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?

1.0

### 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.

9.7%

### 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 -1.0.

10.8%

### Which of the following correlation coefficients will produce the most diversification benefits?

-0.9

### Which of the following correlations coefficients will produce the least diversification benefit?

0.8

### 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?

2rp < (W1212 + W2222)

### Which of the following provides the best example of a systematic risk event?

The Federal Reserve increases interest rates 50 basis points.

###
Which of the following statements is true regarding time diversification?

I. The standard deviation of the average annual rate of return over several

years will be smaller than the one-year standard deviation.

II. For a longer time horizon, uncertainty compounds over a greater number

of years.

III. Time diversification does not reduce risk.

I, II and III

###
Which risk can be diversified away as additional securities are added to a portfolio?

I. Total risk

II. Systematic risk

III. Firm specific risk

I and III

### Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well diversified portfolio of common stock?

Stock B

### Which stock is riskier to a non-diversified investor who puts all his money in only one of these stocks?

Stock A is riskier

###
You are considering adding a new security to your portfolio. In order 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

I, II and III

### You are constructing a scatter plot of excess returns for Stock A versus the market index. If the correlation coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram ______________________ and the line of best fit has a ______________.

all fall on the line of best fit; negative slope

### You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen. You must also find that the ____________.

correlation coefficient between ACE and the market has risen

### You find that the annual standard deviation of a stock's returns is equal to 25%. For a 3 year holding period the standard deviation of your total return would equal _______.

43%

### 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 you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be ________________.

more than 12% but less than 18%