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FIN 419 Ch 6
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Terms in this set (36)
Risk that can be eliminated through diversification is called ______ risk.
All of these options (unique, firm-specific, diversifiable)
The _______ decision should take precedence over the _____ decision.
Asset allocation; stock selection
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
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.
Up; left
An investor's degree of risk aversion will determine his or her ______.
Optimal mix of the risk-free asset and risky asset.
Which of the following statistics cannot be negative?
Variance
Diversification is most effective when security returns are _________.
Negatively correlated
The expected rate of return of a portfolio of risky securities is _________.
The weighted sum of the securities' expected returns.
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
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.
Which one of the following stock return statistics fluctuates the most over time?
Average return
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 ovary independently of each other
On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ the current investment opportunity set.
left and above
The term complete portfolio refers to a portfolio consisting of _________________.
The risk-free asset combined with at least one risky asset.
Rational risk-averse investors will always prefer portfolios _____________.
Located on the capital market line to those located on the efficient frontier
The optimal risky portfolio can be identified by finding:
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.
The _________ reward-to-variability ratio is found on the ________ capital market line.
Highest; steepest
A measure of the riskiness of an asset held in isolation is ____________.
Standard deviation
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 than are the returns of stock B.
20% more
Which risk can be partially or fully diversified away as additional securities are added to a portfolio?
I. Total risk III. Firm-specific risk.
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 from T-bills and the optimal risky portfolio based on the investors degree of risk aversion.
To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.
-1
Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.
less than 1
Which of the following provides the best example of a systematic-risk event?
The Federal Reserve increases interest rates 50 basis points.
Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.
Increase the unsystematic risk of the portfolio.
Which of the following correlation coefficients will produce the least diversification benefit?
.8
Which of the following correlation coefficients will produce the most diversification benefits?
-.9
Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?
None of these options (with a correlation of 1, no risk will be reduced)
A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.
Systematic Risk
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.
The efficient frontier represents a set of portfolios that
Maximize expected return for a given level of risk.
The portfolio with the lowest standard deviation for any risk premium is called the_______.
Global minimum variance portfolio.
Based on the outcomes in the following table, choose which of the statements below is (are) correct?
I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative.
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