5 Written questions
5 Matching questions
- 49. 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
- 65. This stock has greater systematic risk than a stock with a beta of ____.
- 71. Which of the following correlations coefficients will produce the least diversification benefit?
- 44. 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
- 2. The _______ decision should take precedence over the _____ decision.
a. Asset allocation, stock selection
b. Choice of fad, mutual fund selection
c. Stock selection, asset allocation
d. Stock selection, mutual fund selection
- a A. 0.50
- b B. All fall on the line of best fit; negative slope
- c B. I and II only
- d A. Asset allocation, stock selection
- e C. 0.0
5 Multiple choice questions
- A. Stock A is riskier
- B. 19.76%
- D. I, II and III
- D. With a correlation of 1.0, no risk will be reduced
- D. 16%
5 True/False questions
51. You are recalculating the risk of ACE stock in relation to the market index and you find the ratio of the systematic variance to the total variance has risen. You must also find that the _____________.
a. Covariance between ACE and the market has fallen
b. Correlation coefficient between ACE and the market has fallen
c. Correlation coefficient between ACE and the market has risen
d. Unsystematic risk of ACE has risen → C. 1
39. 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 return on A and B is 0.35. 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 __________.
d. 92% → C. 12%
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 0.50. The risk-free rate of return is 10%.
34. The expected return on the optimal risky portfolio is __________.
d. 18.0% → A. 14.0%
84. Which of the following is the most likely reward to variability ratio for a capital allocation line that is optimal, assuming all ratios are generated from the same set of potential assets?
d. 0.69 → D. 0.69
11. Diversification is most effective when security returns are __________.
b. Negatively correlated
c. Positively correlated
d. Uncorrelated → C. The weighted sum of the securities' covariances