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Chapter 6 Quiz
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Terms in this set (25)
The correlation coefficient between two assets equals _________.
their covariance divided by the product of their standard deviations
The risk that can be diversified away is __________.
firm-specific risk
Firm-specific risk is also called __________ and __________.
unique risk; diversifiable risk
Which one of the following stock return statistics fluctuates the most over time?
average return
The term complete portfolio refers to a portfolio consisting of _________________.
the risk-free asset combined with at least one risky asset
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 _________.
Variance of portfolio= pA^2varianceA+pB^2varianceB+2pApBCovariance(A,B)
Covariance=correlation x standard deviation of A x standard deviation of B
covariance=0.0236
varianceAB=0.4^2x0.35^2+0.6^2x0.15^2+2 x0.4 x 0.6 x 0.0236
varianceAB=0.039028
standard deviationAB=variance^1/2=0.197555=19.76%
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 .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is _________.
14%
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 .4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is _________.
21.4%
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 returns on A and B is .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 _________.
...
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. Volatility in excess returns of the stock market
II. The sensitivity of the stock's returns to changes in the stock market
The term excess return refers to ______________.
the difference between the rate of return earned and the risk-free rate
A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?
Beta= Correlation x (Stdv of stock/stdv of mkt)
.45x (.35/.21)
= .74
A security's beta coefficient will be negative if ____________.
its returns are negatively correlated with market-index returns
Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.
between 0 and 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
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 1 will reduce which kind of risk?
none of these options (With a correlation of 1, no risk will be reduced.)
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
I, II, and III
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.
10.8%
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?
(.089-.035)/.12=
45
A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment?
73%
A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project?
25%
In the article "Danger: High Levels of Company Stock," what is the maximum amount of your employer's stock that the author recommends you hold in your retirement account?
10%
The portfolio with the lowest standard deviation for any risk premium is called the_______.
global minimum variance portfolio
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