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D

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

A. unique

B. firm-specific

C. diversifiable

D. all of the above

A. unique

B. firm-specific

C. diversifiable

D. all of the above

A

The _______ decision should take precedence over the _____ decision.

A. asset allocation, stock selection

B. bond selection, mutual fund selection

C. stock selection, asset allocation

D. stock selection, mutual fund selection

A. asset allocation, stock selection

B. bond selection, mutual fund selection

C. stock selection, asset allocation

D. stock selection, mutual fund selection

C

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

A. they had to pay huge fines for obstruction of justice

B. their 401k accounts were held outside the company

C. their 401k accounts were not well diversified

D. none of the above

A. they had to pay huge fines for obstruction of justice

B. their 401k accounts were held outside the company

C. their 401k accounts were not well diversified

D. none of the above

A

. 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 ______.

A. asset A

B. asset B

C. no risky asset

D. can't tell from the data given

A. asset A

B. asset B

C. no risky asset

D. can't tell from the data given

B

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

A. up, right

B. up, left

C. down, right

D. down, left

A. up, right

B. up, left

C. down, right

D. down, left

C

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

A. optimal risky portfolio

B. risk-free rate

C. optimal mix of the risk-free asset and risky asset

D. capital allocation line

A. optimal risky portfolio

B. risk-free rate

C. optimal mix of the risk-free asset and risky asset

D. capital allocation line

B

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

A. covariance

B. correlation coefficient

C. standard deviation

D. reward-to-variability ratio

A. covariance

B. correlation coefficient

C. standard deviation

D. reward-to-variability ratio

B

Which of the following statistics cannot be negative?

A. Covariance

B. Variance

C. E[r]

D. Correlation coefficient

A. Covariance

B. Variance

C. E[r]

D. Correlation coefficient

D

The correlation coefficient between two assets equals to _________.

A. their covariance divided by the product of their variances

B. the product of their variances divided by their covariance

C. the sum of their expected returns divided by their covariance

D. their covariance divided by the product of their standard deviations

A. their covariance divided by the product of their variances

B. the product of their variances divided by their covariance

C. the sum of their expected returns divided by their covariance

D. their covariance divided by the product of their standard deviations

B

Diversification is most effective when security returns are _________.

A. high

B. negatively correlated

C. positively correlated

D. uncorrelated

A. high

B. negatively correlated

C. positively correlated

D. uncorrelated

C

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

A. the sum of the securities' covariances

B. the sum of the securities' variances

C. the weighted sum of the securities' expected returns

D. the weighted sum of the securities' variances

A. the sum of the securities' covariances

B. the sum of the securities' variances

C. the weighted sum of the securities' expected returns

D. the weighted sum of the securities' variances

C

Beta is a measure of security responsiveness to _________.

A. firm specific risk

B. diversifiable risk

C. market risk

D. unique risk

A. firm specific risk

B. diversifiable risk

C. market risk

D. unique risk

B

The risk that can be diversified away is __________.

A. beta

B. firm specific risk

C. market risk

D. systematic risk

A. beta

B. firm specific risk

C. market risk

D. systematic risk

A

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

A. n/(n - 1)

B. n * (n - 1)

C. (n - 1)/n

D. (n - 1) * n

A. n/(n - 1)

B. n * (n - 1)

C. (n - 1)/n

D. (n - 1) * n

C

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 _________.

A. equal to the sum of the securities standard deviations

B. equal to -1

C. equal to 0

D. greater than 0

A. equal to the sum of the securities standard deviations

B. equal to -1

C. equal to 0

D. greater than 0

B

Market risk is also called __________ and _________.

A. systematic risk, diversifiable risk

B. systematic risk, nondiversifiable risk

C. unique risk, nondiversifiable risk

D. unique risk, diversifiable risk

A. systematic risk, diversifiable risk

B. systematic risk, nondiversifiable risk

C. unique risk, nondiversifiable risk

D. unique risk, diversifiable risk

D

Firm specific risk is also called __________ and __________.

A. systematic risk, diversifiable risk

B. systematic risk, non-diversifiable risk

C. unique risk, non-diversifiable risk

D. unique risk, diversifiable risk

A. systematic risk, diversifiable risk

B. systematic risk, non-diversifiable risk

C. unique risk, non-diversifiable risk

D. unique risk, diversifiable risk

C

Which one of the following stock return statistics fluctuates the most over time?

A. Covariance of returns

B. Variance of returns

C. Average return

D. Correlation coefficient

A. Covariance of returns

B. Variance of returns

C. Average return

D. Correlation coefficient

B

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

A. strategies for active securities trading

B. techniques used to identify efficient portfolios of risky assets

C. techniques used to measure the systematic risk of securities

D. techniques used in valuing securities options

A. strategies for active securities trading

B. techniques used to identify efficient portfolios of risky assets

C. techniques used to measure the systematic risk of securities

D. techniques used in valuing securities options

B

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

A. the returns on the stock and bond portfolio tend to move inversely

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

C. the returns on the stock and bond portfolio tend to move together

D. the covariance of the stock and bond portfolio will be positive

A. the returns on the stock and bond portfolio tend to move inversely

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

C. the returns on the stock and bond portfolio tend to move together

D. the covariance of the stock and bond portfolio will be positive

A

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

A. left and above

B. left and below

C. right and above

D. right and below

A. left and above

B. left and below

C. right and above

D. right and below

A

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

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

B. the market portfolio combined with the minimum variance portfolio

C. securities from domestic markets combined with securities from foreign markets

D. common stocks combined with bonds

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

B. the market portfolio combined with the minimum variance portfolio

C. securities from domestic markets combined with securities from foreign markets

D. common stocks combined with bonds

B

Rational risk-averse investors will always prefer portfolios _____________.

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

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

C. at or near the minimum variance point on the efficient frontier

D. that are risk-free to all other asset choices

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

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

C. at or near the minimum variance point on the efficient frontier

D. that are risk-free to all other asset choices

C

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

A. I and II only

B. II and III only

C. III and IV only

D. I and IV only

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

A. I and II only

B. II and III only

C. III and IV only

D. I and IV only

A

Reward-to-variability ratios are ________ on the ________ capital market line.

A. lower; steeper

B. higher; flatter

C. higher; steeper

D. the same; flatter

A. lower; steeper

B. higher; flatter

C. higher; steeper

D. the same; flatter

B

A measure of the riskiness of an asset held in isolation is ____________.

A. beta

B. standard deviation

C. covariance

D. semi-variance

A. beta

B. standard deviation

C. covariance

D. semi-variance

B

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

A. I only

B. I and II only

C. II and III only

D. I, II and III

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

A. I only

B. I and II only

C. II and III only

D. I, II and III

A

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.

A. 20% more

B. slightly more

C. 20% less

D. slightly less

A. 20% more

B. slightly more

C. 20% less

D. slightly less

D

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

I. Total risk

II. Systematic risk

III. Firm specific risk

A. I only

B. I and II only

C. I, II, and III

D. I and III

I. Total risk

II. Systematic risk

III. Firm specific risk

A. I only

B. I and II only

C. I, II, and III

D. I and III

C

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

A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs

B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile

C. 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

D. choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate

A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs

B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile

C. 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

D. choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate

B

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 ______________.

A. all fall on the line of best fit; positive slope

B. all fall on the line of best fit; negative slope

C. are widely scattered around the line; positive slope

D. are widely scattered around the line; negative slope

A. all fall on the line of best fit; positive slope

B. all fall on the line of best fit; negative slope

C. are widely scattered around the line; positive slope

D. are widely scattered around the line; negative slope