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Quiz 2 Investments
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Key Concepts:
Terms in this set (23)
The correlation coefficient between two assets equals
their covariance divided by the product of their standard deviations
The expected rate of return of a portfolio of risky securities is
the weighted sum of the securities' expected returns
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.
...
Which risk can be partially or fully diversified away as additional securities are added to a portfolio?
I. Total risk
II. Systematic risk
III. Firm-specific risk
I & III
Diversification is most effective when security returns are
negatively correlated
Lear Corp. has an expected excessreturn 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?
Excess return = 8% + (5%)(1.43) + 0% = 15.15%
The _________ reward-to-variability ratio is found on the ________ capital allocation line.
Highest;Steepest
An investor's degree of risk aversion will determine his or her
optimal mix of the risk-free asset and risky asset
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
A security's beta coefficient will be negative if
its returns are negatively correlated with market-index returns
The efficient frontier represents a set of portfolios that
maximize expected return for a given level of risk.
Which of the following correlation coefficients will produce the least diversification benefit?
.8
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.
Up;Left
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
Risk that can be eliminated through diversification is called ______ risk.
unique
firm-specific
diversifiable
all of these options
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 proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.
...
Risk that can be eliminated through diversification is called ______ risk.
unique
firm-specific
diversifiable
all of these options
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
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
The risk that can be diversified away is __________.
Firm-specific risk
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 _________.
σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45)
σ2p = .039046
σp = 19.76%
Beta is a measure of security responsiveness to _________.
Market Risk
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