12 terms

The term excess-return refers to ______.

the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

A. 1

B. less than 1

C. between 0 and 1

D. less than or equal to 0

A. 1

B. less than 1

C. between 0 and 1

D. less than or equal to 0

B. less than 1

If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the _____.

stock's standard deviation

If you want to know the portfolio standard deviation for a three stock portfolio you will have to

calculate three covariances.

Which of the following correlations coefficients will produce the least diversification benefit?

A. -0.6

B. -0.3

C. 0

D. 0.8

A. -0.6

B. -0.3

C. 0

D. 0.8

D. 0.8

You are considering adding a new security to your portfolio. In order 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

Choose the correct roman numerals.

I. expected return

II. standard deviation

III. correlation with your portfolio

Choose the correct roman numerals.

I, II, and III are all correct

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

D. all of the above

An investor's degree of risk aversion will determine his/her ___________.

optimal mix of the risk-free asset and risky asset

Diversification is most effective when security returns are ______.

negatively correlated

Beta is a measure of security responsiveness to _______.

market risk

Consider an investment opportunity set formed with 2 securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always ___________.

zero

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

techniques used to identify efficient portfolios of risky assets