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acfi 702 chapter 6
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Terms in this set (18)
Risk that can be eliminated through diversification is called ______ risk.
unique, firm-specific, diversifiable... all of the above
The _______ decision should take precedence over the _____ decision.
asset allocation; stock selection
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?
.40
Diversification is most effective when security returns are _________.
negatively correlated
Beta is a measure of security responsiveness to _________.
market risk
The risk that can be diversified away is __________.
firm-specific risk
Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?
20-30
Market risk is also called __________ and _________.
systematic risk; nondiversifiable risk
Firm-specific risk is also called __________ and __________.
unique risk; diversifiable risk
Harry Markowitz is best known for his Nobel Prize-winning work on _____________.
techniques used to identify efficient portfolios of risky assets
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.
the returns on the stock and bond portfolios tend to vary independently of each other
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 ________________.
more than 12% but less than 18%
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 .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%
Which of the following correlation coefficients will produce the least diversification benefit?
A. -.6
B. -.3
C. 0
D. .8
Which of the following correlation coefficients will produce the most diversification benefits?
A. -.6
B. -.9
C. 0
D. .4
What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?
1
Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?
unique risk
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.
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