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02Student: ___________________________________________________________________________

1. The __________ return is the average projected return of an asset in different states of the economy. A. VariableB. RealizedC. PortfolioD. ExpectedE. Potential

2. A combination of assets held by an investor is known as a(n) __________.

A. Opportunity setB. Efficient assetC. Markowitz selectionD. PortfolioE. Minimum variance option

3. The portfolio weight of an asset is the

A. Market value of that asset expressed as a percentage of the asset's initial costB. Market value of that asset expressed as a percentage of the total portfolio valueC. Cost invested in that asset expressed as a percentage of the total cost of the portfolioD. Number of shares held in that asset divided by the total number of shares ownedE. Return on the asset as a fraction of the entire return on the portfolio

4. The reduction in risk realized when a portfolio is invested in a variety of assets is called

A. Stock selectionB. DiversificationC. CorrelationD. Stock managementE. Opportunity investing

5. __________ is the extent to which the returns on two assets move together.

A. Standard deviationB. VarianceC. CorrelationD. EfficiencyE. Tangency

6. __________ is a statistical measure of the degree to which two variables (e.g. securities' returns) move

together. A. CovarianceB. VarianceC. SkewnessD. Coefficient of variationE. Tangency

7. The manner in which an investor spreads his portfolio across a variety of securities is called

A. The efficient frontierB. CorrelationC. MinimizationD. Asset allocationE. The investment opportunity set

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8. All possible risk-return combinations available from portfolios consisting of different group of assets are the __________. A. efficient frontierB. investment opportunity setC. portfolio setD. correlationE. capital asset pricing model

9. A(n) __________ portfolio offers the lowest risk for a given level of return or it generates the highest

possible return for a given level of risk A. DiversifiedB. MarketC. EfficientD. StockE. Opportunity

10. The Markowitz efficient frontier is defined as the

A. Entire set of efficient portfolios given varying levels of riskB. Highest level of return that can be obtained given any combination of tow individual assetsC. Single most efficient portfolio that can be generated from two individual assetsD. Total possible risk-return combination that can be generated from two individual assetsE. Minimum variance portfolio

11. The extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset is

called the A. Inefficient premiumB. Diversification benefitC. Expected returnD. Portfolio adjustmentE. Risk premium

12. Which of the following is true given various states of the economy?

A. Stock returns are generally not affected by the state of the economyB. The summation of the probabilities of the various economic states must equal to 10C. The majority of stock returns increase as the state of the economy worsensD.

Both the risk and return on a security are affected by the likelihood of various economic states occurring

E.

The probabilities of the various economic states affect the expected return on a stock, but not the level of risk associated with those returns

13. Which of the following is true given various states of the economy?

A. The various economic states of the economy are generally equally likely to occur in any given yearB. Most stocks tend to have the same return regardless of the economic stateC. The expected state of the economy can have a major impact on the expected return on a portfolioD.

If the economy moves into a recession period from a normal period, all stocks will have lower expected returns

E.

A change in the probability of a state of the economy occurring has no impact on the expected return on a portfolio of risky assets


14. Which of the following portfolio values are weighted average?I) Expected returnII) Standard deviationIII) CorrelationIV) Beta A. I and IIIB. I and IVC. II and IIID. II and IVE. I, II and IV

15. You are computing the expected return on a portfolio of six stocks given three states of the economy.

How will the expected return of the portfolio be computed given an economic state? A. Add up the returns on each stock and divide by 6B. Sum up the returns on each stock and divide by (6 - 1)C.

Multiply the individual returns with the weights based on the market value of each of the stock position

D. Multiply the individual returns with the weights based on the relative prices of each stock positionE. Multiply the individual returns with the weights based on the number of shares of each stock owned

16. A stock is projected to return 15% during economic booms, -4% during recessions and 8% otherwise.

If reports indicate the probability of a boom has decreased what would happen to the stock's expected return? A. There would be no change to the expected return.B. The expected return would increase.C. The expected return would decrease.D. The expected return would increase or remain constant.E. The expected return would decrease or remain constant.

17. NEW A stock is projected to return 15% during economic booms, -4% during recessions and 8%

otherwise. If reports indicate the probability of a recession has decreased, what would happen to the stock's expected return? A. There would be no change to the expected return.B. The expected return would increase.C. The expected return would decrease.D. The expected return would increase or remain constant.E. The expected return would decrease or remain constant.

18. The expected risk premium on a security is computed by

A. Subtracting the security's expected return from the risk-free rateB. Subtracting the expected market return from the security's expected returnC. Subtracting the risk-free rate from the security's expected returnD. Adding the security's expected return to the risk-free rateE. Adding the security's expected return to the expected return on the market

19. If the future return on a security is known with certainty, then the risk premium on that security should be

equal to A. ZeroB. The risk-free rateC. The market rateD. The market rate minus the risk-free rateE. The risk-free rate plus one-half of the market rate


20. Variance is a measure of A. ReturnB. RiskC. CorrelationD. DiversificationE. Efficiency

21. All else constant, the risk premium on a security will decrease when the

I) security's expected return increasesII) security's expected return decreasesIII) risk-free rate increasesIV) risk-free rate decreases A. IB. IIC. I and IIID. I and IVE. II and III

22. Which of the following shows how much different an outcome may be from what is anticipated on the

basis of a central tendency measure? A. Standard deviationB. Coefficient of variationC. Standard meansD. CovarianceE. Histogram

23. You own Stock A with a standard deviation of 48% and Stock B with a standard deviation of 35%. As

you add more Stock A to your portfolio, the standard deviation of your portfolio will: A. always increase.B. always decrease.C. remain the same.D. It depends on the initial weights and the correlation.E. Insufficient information.

24. The expected return on a portfolio is affected by the

I) choice of securities held in the portfolioII) return of each security given a particular economic stateIII) portfolio weight assigned to each securityIV) probability of each economic state occurring A. II and IIIB. II and IvC. I, II and IIID. II, III and IvE. I, II, III and IV

25. A particular portfolio has an expected return that is unaffected by the state of the economy. The variance

of this portfolio must A. Be negativeB. Be less than 1C. Be greater than 1D. Be equal to 1E. Be equal to 0


26. As the number of stocks in a portfolio increases, the portfolio standard deviation A. Increases at a diminishing rateB. Increases at an increasing rateC. Decreases at a diminishing rateD. Remains unchangedE. Decreases at an increasing rate

27. The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as the

__________ risk. A. MarketB. DiversifiableC. Non-diversifiableD. InefficientE. Efficient

28. The minimum correlation is __________ and the maximum correlation is __________.

A. - 1; 0B. - 1; + 1C. 0 ; + 1D. - 100; +100E. negative infinity; positive infinity

29. All else the same, a correlation of __________ will result in the least diversification benefits.

A. - 100B. - 1C. 0D. + 1E. + 100

30. Two assets with a correlation coefficient of -1

A. Will both have increasing returns at the same timeB. Will both have decreasing returns at the same timeC. Will have increasing returns for one when there are decreasing returns for the otherD. Will have decreasing returns in an economic boomE. Will have increasing returns in an economic recession

31. A correlation coefficient of __________ indicates a perfect positive correlation.

A. 0B. 0.5C. 1D. 10E. 100

32. In a two-stock portfolio, stocks with a correlation coefficient of __________ will results in a smallest

possible standard deviation for the portfolio. A. - 1B. - 0.5C. 0D. + 0.5E. + 1

33. Consider the stock returns of Sun Life, Research in Motion, and the Bank of Montreal. You would expect

the greatest correlation between the stocks of: A. Sun Life and Research in Motion.B. Bank of Montreal and Sun Life.C. Research in Motion and Sun Life.D. All correlations would be about the same.E. Insufficient information.


34. If the correlation between two assets is __________, all risk can be eliminated in a portfolio. A. - 100B. - 1C. 0D. + 1E. + 100

35. The greater the variance of a portfolio,

A. The less certain the actual returnB. The lower the level of riskC. The lower the expected returnD. The smaller the standard deviationE. The greater the number of individual securities held

36. Which of the following assets cannot lie on the Markowitz efficient frontier?

A. Expected return = 10 percent; Standard deviation = 38 percentB. Expected return = 12 percent; Standard deviation = 49 percentC. Expected return = 9 percent; Standard deviation = 41 percentD. Expected return = 14 percent; Standard deviation = 51 percentE. All of the assets could lie on the Markowitz efficient frontier.

37. Which of the following assets cannot lie on the Markowitz efficient frontier?

A. Expected return = 16 percent; Standard deviation = 62 percentB. Expected return = 13 percent; Standard deviation = 45 percentC. Expected return = 9 percent; Standard deviation = 36 percentD. Expected return = 11 percent; Standard deviation = 47 percentE. All of the assets could lie on the Markowitz efficient frontier.

38. To lie on the Markowitz efficient frontier, an asset must have a __________ expected return than any

other asset with the same standard deviation. The asset must also have a __________ standard deviation than any other asset with the same expected return. A. higher: higherB. higher; lowerC. lower; lowerD. lower; higherE. Insufficient information.

39. The major benefit of diversification is to:

A. increase the expected return.B. decrease the expected return.C. decrease the risk.D. make the stock market more efficient.E. increase investor participation in the market.

40. You have a portfolio of two stocks. As you increase the weight of the lowest risk stock, the risk of your

portfolio will: A. increase.B. decrease.C. remain the same.D. increase or decrease depending on the correlation.E. decrease or remain the same.

41. Which of the following is false about the expected risk premium of an asset?

A. The expected risk premium is always positive.B. The risk premium is the expected return of a risky asset minus the risk-free rate.C. The expected risk premium is the reward for bearing risk.D. The risk-free asset has no risk premium.E. All of the above are true.


42. Stock ABC has an expected return of 12% and a standard deviation of 48%. Which of the following stocks dominate Stock ABC? A. Expected return = 14%; Standard deviation = 53%B. Expected return = 10%; Standard deviation = 31%C. Expected return = 13%; Standard deviation = 45%D. Expected return = 11%; Standard deviation = 52%E. None of these stocks dominate stock ‘ABC'.

43. Which of the following statements is false regarding diversification?

A. Adding assets will always reduce risk.B. Diversification works because some risks are not common to all assets.C. Diversification benefits occur most when the assets have a low correlation.D. The market is a completely diversified portfolio.E.

A diversified portfolio always has less risk than the highest risk asset assuming the correlation between the assets is less than one and the standard deviation of the assets is not the same.

44. A stock has an expected return of 14 percent and a standard deviation of 61 percent. What is the weight of

the stock in the minimum variance portfolio consisting of the stock and the risk-free asset? A. .00B. .18C. .06D. .21E. .32

45. The reason why a fully-diversified portfolio does not have zero risk is that some risk is:

A. diversifiable.B. unrelated.C. not correlated.D. nondiversifiable.E. intrinsic.

46. As the probabilities associated with the expected returns of an asset change, the standard deviation of the

asset will: A. increase.B. decrease.C. remain the same.D. increase or decrease.E. decrease if the expected return decreases.

47. Which of the following statements is false regarding the investment opportunity set of two assets?

A. If the correlation is + 1, it is a straight line.B. It graphically illustrates all possible portfolio combinations between the two assets.C. It is a straight line if one of the assets is risk-free.D. Assuming positive portfolio weights, it can never plot below the lowest expected return asset.E. It is not applicable when the assets have a zero correlation.

48. A portfolio that plots below the minimum variance portfolio is __________.

A. dominantB. inefficientC. correlatedD. optimalE. redundant


49. Stock X has an expected return of 10 percent and a standard deviation of 38 percent. Stock Y has an expected return of 13 percent and a standard deviation of 48 percent. The weight of Stock X in the minimum variance portfolio of the two assets is __________ than the weight of Stock Y. A. greaterB. lessC. the sameD. less only if the correlation is negativeE. greater only if the correlation is positive

50. An asset on the Markowitz efficient frontier has:

A. the greatest return for a given level of risk.B. less risk than the market.C. the greatest risk for a given level of return.D. a return greater than the market.E. A single asset cannot lie on the efficient frontier, only portfolios.

51. In the analysis of the Markowitz efficient frontier, which of the following information is not needed?

A. The correlation between every possible pair of assets.B. The weight of every asset.C. The expected rerun of every asset.D. The standard deviation of every asset.E. All of the above are needed.

52. Which of the following is false regarding the efficient frontier?

A. A stock that lies above the efficient frontier is overvalued.B. The efficient frontier includes stocks, bonds, and all other assets.C. The efficient frontier may include individual stocks as well as portfolios.D. A bond can lie on the efficient frontier.E. All of the above are true.

53. The correlation between Stock A and Stock B is 0.40. The correlation between Stock A and Stock C is

0.20, and the correlation between Stock B and Stock C is 0.25. All else the same, which of the following portfolios will have the least risk? A. All invested in Stock A.B. All invested in Stock C.C. Equally invested in Stock A and Stock B.D. Equally invested in Stock B and Stock C.E. Equally invested in Stock A and Stock C.

54. The market consists of two stocks. Stock F has an expected return of 9 percent and a standard deviation

of 32 percent. Stock G has an expected return of 13 percent and a standard deviation of 50 percent. The correlation between the two stocks is -0.10. The efficient frontier is: A. the line between Stock F and Stock G.B. the line between the minimum variance portfolio and Stock F.C. the line between the minimum variance portfolio and Stock G.D. all to the right of Stock F on the risk/return graph.E. all to the right of Stock G on the risk/return graph.

55. Which of the following is true regarding the standard deviation for a portfolio?

A. The portfolio's standard deviation must be less than the individual standard deviations.B. The standard deviation of the portfolio falls continuously as more assets are added.C. The standard deviation for a portfolio is a weighted average of individual standard deviations.D. All of the above.E. None of the above.


56. What is the possible correlation between a Bombardier stock with a standard deviation of 50 percent and a Treasury bill issued by Government of Canada? A. - 100B. - 1C. 0D. + 1E. + 100

57. For the standard deviation of a minimum variance portfolio of two assets to be zero, the correlation

between the assets must be __________. A. - 100B. - 1C. 0D. + 1E. + 100

58. What is the typical range of the variance of return for a stock portfolio?

A. 0 to 1B. - 1 to + 1C. 0 to + 100D. Between the high and low values for the individual returns being usedE. No precise range exists

59. What is the risk premium of a stock that has an expected return of 14.2 percent if the risk-free rate is 5.7

percent? A. 9.4%B. 19.9%C. 7.5%D. 7.9%E. 8.5%

60. What is the risk-free rate if there is a stock with a risk premium of 9.5 percent and the return of the stock

is 19.9 percent? A. 29.4%B. 10.4%C. 2.1%D. 8.7%E. 12.5%

61. What is the expected return of a stock with a risk premium of 7.6 percent if the risk-free rate is 4.8

percent? A. 12.4%B. 13.1%C. 11.3%D. 2.8%E. 11.7%

62. An investor has $800 invested in Stock X and $1,300 invested in Stock Y. What is the portfolio weight of

Stock Y? A. 41%B. 38%C. 27%D. 33%E. 62%


63. You have a portfolio with 200 shares of Stock A at a price of $34 and 300 shares of Stock B at a price of $28. What is the weight of Stock A in your portfolio? A. 55%B. 41%C. 45%D. 51%E. 37%

64. What is the expected return of Stock R?

A. 12.42%B. 14.11%C. 10.05%D. 13.10%E. 11.65%

65. What is the variance of Stock R?

A. 0.0328B. 0.0416C. 0.0292D. 0.0375E. 0.0253

66. What is the standard deviation of Stock R?

A. 17.10%B. 26.82%C. 21.85%D. 14.28%E. 23.43%

67. What is the expected return of Stock F?

A. 10.67%B. 11.15%C. 10.10%D. 11.76%E. 10.86%

68. What is the variance of Stock F?

A. 0.1994B. 0.1741C. 0.2217D. 0.1823E. 0.2074

69. What is the standard deviation of Stock F?

A. 50.86%B. 44.65%C. 41.37%D. 35.21%E. 23.06%


70. If the risk-rate is 5.8 percent, what is the risk premium of Stock F? A. 15.9%B. 5.25%C. 4.87%D. 4.30%E. 5.06%

71. What is the expected return of Stock P?

A. 15.3%B. 10.9%C. 17.1%D. 14.4%E. 15.8%

72. What is the expected return of Stock Q?

A. 12.3%B. 9.8%C. 10.9%D. 11.2%E. 8.5%

73. What is the expected return of a portfolio 60 percent invested in Stock P and the remainder in Stock Q?

A. 14.30%B. 13.19%C. 15.17%D. 12.56%E. 10.66%

74. What is the standard deviation of a portfolio 60 percent invested in Stock P and the remainder in Stock

Q? A. 5.88%B. 1.46%C. 4.27%D. 2.63%E. 3.30%

75. A portfolio is equally invested in two stocks. The standard deviations are 58% and 46%, respectively. If

the correlation between the stocks is 0.24, what is the variance of the portfolio? A. 0.1690B. 0.2382C. 0.1813D. 0.2489E. 0.2046

76. Stock J has a standard deviation of 67 percent, and Stock K has a standard deviation of 51 percent. The

correlation between the two stocks is -0.10. What is the variance of a portfolio of the two assets with 35 percent invested in Stock J? A. 0.1026B. 0.2318C. 0.1653D. 0.1493E. 0.1986


77. Stock J has a standard deviation of 67 percent and Stock K has a standard deviation of 51 percent. The correlation between the two stocks is -0.10. What is the standard deviation of a portfolio of the two assets with 35 percent invested in Stock J? A. 46.23%B. 38.64%C. 41.07%D. 35.19%E. 43.82%

78. Suppose a portfolio has 55 percent of its assets invested in Stock S with a standard deviation of 40

percent and the remainder in Stock T with a standard deviation of 12 percent. If the correlation between the two stocks is 0.22, what is the standard deviation of the portfolio? A. 21.05%B. 22.94%C. 23.78%D. 24.68%E. 25.56%

79. Stock G has a standard deviation of 49 percent, and Stock H has a standard deviation of 56 percent. The

covariance between the two assets is 0.046. What is the variance of a portfolio with 40 percent of its assets invested in Stock G? A. 0.1686B. 0.1247C. 0.1096D. 0.1734E. 0.1535

80. Stock G has a standard deviation of 49 percent, and Stock H has a standard deviation of 56 percent. The

covariance between the two assets is 0.046. What is the standard deviation of a portfolio with 40 percent of its assets invested in Stock G? A. 41.64%B. 33.35%C. 44.07%D. 39.52%E. 35.31%

81. Stocks D, E and F have standard deviations of 2 percent, 10 percent and 40 percent, respectively. The

correlation coefficients between the stocks are as follows: 0.4 for D and E, -0.4 for D and F, and -0.2 E and F. What is the standard deviation of a portfolio with a mix of 30-30-40 percent in D, E and F? A. 15.49%B. 13.35%C. 14.07%D. 19.52%

82. You have a three-stock portfolio. Stock A has an expected return of 12% and a standard deviations of

41%. Stock B has an expected return of 16% and a standard deviation of 58%. Stock C has an expected return of 13% and a standard deviation of 48%. The correlation coefficient between the Stocks A and B is 0.3, between Stocks A and C is 0.2, and between Stocks B and C is 0.05. Your portfolio consists of 30% Stock A, 50% Stock B and 20% Stock C. What is the standard deviation of this portfolio? A. 35.97%B. 36.52%C. 34.75%D. 37.06%E. 38.21%


83. Stock S has an expected return of 8 percent and a standard deviation of 20 percent. Stock B has an expected return of 3 percent and a standard deviation of 12 percent. If the correlation of the two stocks is 0.15, what is the weight of Stock S in the minimum variance portfolio? A. 0.287B. 0.236C. 0.368D. 0.229E. 0.410

84. Stock S has an expected return of 8 percent and a standard deviation of 20 percent. Stock B has an

expected return of 3 percent and a standard deviation of 12 percent. If the correlation of the two stocks is 0.15, what is the expected return of the minimum variance portfolio? A. 15.40%B. 17.71%C. 4.15%D. 10.37%E. 6.91%

85. The correlation between two stocks is -0.25. The standard deviation of Stock I is 48 percent, and the

standard deviation of Stock J is 34 percent. What is the weight of Stock I in the minimum variance portfolio? A. 0.486B. 0.366C. 0.410D. 0.532E. 0.461

86. While Stock A has a standard deviation of 37 percent, Stock B has a standard deviation of 46 percent. If

the correlation between the stocks is 0.1528, what is the covariance? A. 0.1702B. 0.0260C. 0.2875D. 0.1270E. 0.0565

87. While Stock A has a standard deviation of 37 percent, Stock B has a standard deviation of 46 percent.

Given the covariance between the two stocks is -0.0255, determine the correlation coefficient. A. - 0.25B. 0.60C. - 0.15D. 0.30E. 0.15

88. While the covariance between the two stocks, G and H, is 0.0357, the correlation coefficient is 0.17.

Given Stock G has a standard deviation of 50 percent, what is the standard deviation of Stock H? A. 49%B. 56%C. 24%D. 42%E. 61%


89. Consider the following correlation coefficient for stocks M, N, P and Q. Which portfolio will have the least diversification benefit?

A. M and NB. N and PC. P and QD. M and PE. N and Q

90. Why are some risks diversifiable and others nondiversifiable? Give an example of each.

91. What is the importance of the minimum variance portfolio? All else the same, what effect does the

correlation between two risky assets have on the minimum variance portfolio?

92. In basic terms, what is the major benefit of diversification? How does diversification work?

93. Why is Markowitz portfolio analysis most commonly used to make asset allocation decisions?

94. Explain why changes in economic outlook may cause an investor to change his asset allocation.


95. What assumptions are made about an investor when considering how they wish to allocate assets and construct their investment portfolio?

96. Describe the difference between the ‘expected return' and the ‘realized return' of an asset.


02 Key 1. The __________ return is the average projected return of an asset in different states of the

economy. A. VariableB. RealizedC. PortfolioD. ExpectedE. Potential

Jordan - Chapter 02 #1

Level: EasySection: 2.1-Expected Returns and Variances

Topic: Expected Return

2. A combination of assets held by an investor is known as a(n) __________. A. Opportunity setB. Efficient assetC. Markowitz selectionD. PortfolioE. Minimum variance option


Level: EasySection: 2.2-Portfolios

Topic: Portfolio

3. The portfolio weight of an asset is the A. Market value of that asset expressed as a percentage of the asset's initial costB. Market value of that asset expressed as a percentage of the total portfolio valueC. Cost invested in that asset expressed as a percentage of the total cost of the portfolioD. Number of shares held in that asset divided by the total number of shares ownedE. Return on the asset as a fraction of the entire return on the portfolio


Level: MediumSection: 2.2-Portfolios

Topic: Portfolio Weights

4. The reduction in risk realized when a portfolio is invested in a variety of assets is called A. Stock selectionB. DiversificationC. CorrelationD. Stock managementE. Opportunity investing


Level: EasySection: 2.3-Diversification and Portfolio Risk

Topic: Diversification

5. __________ is the extent to which the returns on two assets move together. A. Standard deviationB. VarianceC. CorrelationD. EfficiencyE. Tangency


Level: EasySection: 2.4-Correlation and Diversification

Topic: Correlation


6. __________ is a statistical measure of the degree to which two variables (e.g. securities' returns) move together. A. CovarianceB. VarianceC. SkewnessD. Coefficient of variationE. Tangency



Topic: Covariance

7. The manner in which an investor spreads his portfolio across a variety of securities is called A. The efficient frontierB. CorrelationC. MinimizationD. Asset allocationE. The investment opportunity set


Level: EasySection: 2.6-Asset Allocation and Securities Selection Decisions of Portfolio Formation

Topic: Asset Allocation

8. All possible risk-return combinations available from portfolios consisting of different group of assets are the __________. A. efficient frontierB. investment opportunity setC. portfolio setD. correlationE. capital asset pricing model



Topic: Investment Opportunity Set

9. A(n) __________ portfolio offers the lowest risk for a given level of return or it generates the highest possible return for a given level of risk A. DiversifiedB. MarketC. EfficientD. StockE. Opportunity


Level: MediumSection: 2.4-Correlation and Diversification

Topic: Efficient Portfolio

10. The Markowitz efficient frontier is defined as the A. Entire set of efficient portfolios given varying levels of riskB. Highest level of return that can be obtained given any combination of tow individual assetsC. Single most efficient portfolio that can be generated from two individual assetsD. Total possible risk-return combination that can be generated from two individual assetsE. Minimum variance portfolio


Level: MediumSection: 2.5-The Markowitz Efficient Frontier

Topic: Markowitz Efficient Frontier


11. The extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset is called the A. Inefficient premiumB. Diversification benefitC. Expected returnD. Portfolio adjustmentE. Risk premium



Topic: Risk Premium

12. Which of the following is true given various states of the economy? A. Stock returns are generally not affected by the state of the economyB. The summation of the probabilities of the various economic states must equal to 10C. The majority of stock returns increase as the state of the economy worsensD. Both the risk and return on a security are affected by the likelihood of various economic states

occurringE.

The probabilities of the various economic states affect the expected return on a stock, but not the level of risk associated with those returns


Level: MediumSection: 2.1-Expected Returns and Variances

Topic: Economic States

13. Which of the following is true given various states of the economy? A. The various economic states of the economy are generally equally likely to occur in any given yearB. Most stocks tend to have the same return regardless of the economic stateC. The expected state of the economy can have a major impact on the expected return on a portfolioD.

If the economy moves into a recession period from a normal period, all stocks will have lower expected returns

E.

A change in the probability of a state of the economy occurring has no impact on the expected return on a portfolio of risky assets



Topic: Economic States

14. Which of the following portfolio values are weighted average?I) Expected returnII) Standard deviationIII) CorrelationIV) Beta A. I and IIIB. I and IVC. II and IIID. II and IVE. I, II and IV





15. You are computing the expected return on a portfolio of six stocks given three states of the economy. How will the expected return of the portfolio be computed given an economic state? A. Add up the returns on each stock and divide by 6B. Sum up the returns on each stock and divide by (6 - 1)C. Multiply the individual returns with the weights based on the market value of each of the stock

positionD. Multiply the individual returns with the weights based on the relative prices of each stock positionE. Multiply the individual returns with the weights based on the number of shares of each stock

owned

Jordan - Chapter 02 #15Level: Easy

Section: 2.2-PortfoliosTopic: Portfolio Weights

16. A stock is projected to return 15% during economic booms, -4% during recessions and 8% otherwise. If reports indicate the probability of a boom has decreased what would happen to the stock's expected return? A. There would be no change to the expected return.B. The expected return would increase.C. The expected return would decrease.D. The expected return would increase or remain constant.E. The expected return would decrease or remain constant.




17. NEW A stock is projected to return 15% during economic booms, -4% during recessions and 8% otherwise. If reports indicate the probability of a recession has decreased, what would happen to the stock's expected return? A. There would be no change to the expected return.B. The expected return would increase.C. The expected return would decrease.D. The expected return would increase or remain constant.E. The expected return would decrease or remain constant.




18. The expected risk premium on a security is computed by A. Subtracting the security's expected return from the risk-free rateB. Subtracting the expected market return from the security's expected returnC. Subtracting the risk-free rate from the security's expected returnD. Adding the security's expected return to the risk-free rateE. Adding the security's expected return to the expected return on the market



Topic: Expected Risk Premium

19. If the future return on a security is known with certainty, then the risk premium on that security should be equal to A. ZeroB. The risk-free rateC. The market rateD. The market rate minus the risk-free rateE. The risk-free rate plus one-half of the market rate



Topic: Risk Premium


20. Variance is a measure of A. ReturnB. RiskC. CorrelationD. DiversificationE. Efficiency



Topic: Variance

21. All else constant, the risk premium on a security will decrease when theI) security's expected return increasesII) security's expected return decreasesIII) risk-free rate increasesIV) risk-free rate decreases A. IB. IIC. I and IIID. I and IVE. II and III



Topic: Risk Premium

22. Which of the following shows how much different an outcome may be from what is anticipated on the basis of a central tendency measure? A. Standard deviationB. Coefficient of variationC. Standard meansD. CovarianceE. Histogram


Level: EasySection: 2.3-Diversification and Portfolio Risk


23. You own Stock A with a standard deviation of 48% and Stock B with a standard deviation of 35%. As you add more Stock A to your portfolio, the standard deviation of your portfolio will: A. always increase.B. always decrease.C. remain the same.D. It depends on the initial weights and the correlation.E. Insufficient information.


Level: HardSection: 2.3-Diversification and Portfolio Risk



24. The expected return on a portfolio is affected by theI) choice of securities held in the portfolioII) return of each security given a particular economic stateIII) portfolio weight assigned to each securityIV) probability of each economic state occurring A. II and IIIB. II and IvC. I, II and IIID. II, III and IvE. I, II, III and IV



Topic: Portfolio Returns

25. A particular portfolio has an expected return that is unaffected by the state of the economy. The variance of this portfolio must A. Be negativeB. Be less than 1C. Be greater than 1D. Be equal to 1E. Be equal to 0



Topic: Portfolio Variance

26. As the number of stocks in a portfolio increases, the portfolio standard deviation A. Increases at a diminishing rateB. Increases at an increasing rateC. Decreases at a diminishing rateD. Remains unchangedE. Decreases at an increasing rate


Level: HardSection: 2.2-Portfolios

Topic: Portfolio Standard Deviation

27. The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as the __________ risk. A. MarketB. DiversifiableC. Non-diversifiableD. InefficientE. Efficient



Topic: Diversifiable Risk

28. The minimum correlation is __________ and the maximum correlation is __________. A. - 1; 0B. - 1; + 1C. 0 ; + 1D. - 100; +100E. negative infinity; positive infinity



Topic: Correlation


29. All else the same, a correlation of __________ will result in the least diversification benefits. A. - 100B. - 1C. 0D. + 1E. + 100



Topic: Correlation

30. Two assets with a correlation coefficient of -1 A. Will both have increasing returns at the same timeB. Will both have decreasing returns at the same timeC. Will have increasing returns for one when there are decreasing returns for the otherD. Will have decreasing returns in an economic boomE. Will have increasing returns in an economic recession



Topic: Correlation

31. A correlation coefficient of __________ indicates a perfect positive correlation. A. 0B. 0.5C. 1D. 10E. 100



Topic: Correlation

32. In a two-stock portfolio, stocks with a correlation coefficient of __________ will results in a smallest possible standard deviation for the portfolio. A. - 1B. - 0.5C. 0D. + 0.5E. + 1



Topic: Correlation

33. Consider the stock returns of Sun Life, Research in Motion, and the Bank of Montreal. You would expect the greatest correlation between the stocks of: A. Sun Life and Research in Motion.B. Bank of Montreal and Sun Life.C. Research in Motion and Sun Life.D. All correlations would be about the same.E. Insufficient information.



Topic: Correlation


34. If the correlation between two assets is __________, all risk can be eliminated in a portfolio. A. - 100B. - 1C. 0D. + 1E. + 100



Topic: Correlation

35. The greater the variance of a portfolio, A. The less certain the actual returnB. The lower the level of riskC. The lower the expected returnD. The smaller the standard deviationE. The greater the number of individual securities held




36. Which of the following assets cannot lie on the Markowitz efficient frontier? A. Expected return = 10 percent; Standard deviation = 38 percentB. Expected return = 12 percent; Standard deviation = 49 percentC. Expected return = 9 percent; Standard deviation = 41 percentD. Expected return = 14 percent; Standard deviation = 51 percentE. All of the assets could lie on the Markowitz efficient frontier.


Level: HardSection: 2.5-The Markowitz Efficient Frontier


37. Which of the following assets cannot lie on the Markowitz efficient frontier? A. Expected return = 16 percent; Standard deviation = 62 percentB. Expected return = 13 percent; Standard deviation = 45 percentC. Expected return = 9 percent; Standard deviation = 36 percentD. Expected return = 11 percent; Standard deviation = 47 percentE. All of the assets could lie on the Markowitz efficient frontier.




38. To lie on the Markowitz efficient frontier, an asset must have a __________ expected return than any other asset with the same standard deviation. The asset must also have a __________ standard deviation than any other asset with the same expected return. A. higher: higherB. higher; lowerC. lower; lowerD. lower; higherE. Insufficient information.


Level: MediumSection: 2.5-The Markowitz Efficient Frontier



39. The major benefit of diversification is to: A. increase the expected return.B. decrease the expected return.C. decrease the risk.D. make the stock market more efficient.E. increase investor participation in the market.


Level: MediumSection: 2.3-Diversification and Portfolio Risk


40. You have a portfolio of two stocks. As you increase the weight of the lowest risk stock, the risk of your portfolio will: A. increase.B. decrease.C. remain the same.D. increase or decrease depending on the correlation.E. decrease or remain the same.




41. Which of the following is false about the expected risk premium of an asset? A. The expected risk premium is always positive.B. The risk premium is the expected return of a risky asset minus the risk-free rate.C. The expected risk premium is the reward for bearing risk.D. The risk-free asset has no risk premium.E. All of the above are true.



Topic: Risk Premium

42. Stock ABC has an expected return of 12% and a standard deviation of 48%. Which of the following stocks dominate Stock ABC? A. Expected return = 14%; Standard deviation = 53%B. Expected return = 10%; Standard deviation = 31%C. Expected return = 13%; Standard deviation = 45%D. Expected return = 11%; Standard deviation = 52%E. None of these stocks dominate stock ‘ABC'.



Topic: Dominated Portfolios

43. Which of the following statements is false regarding diversification? A. Adding assets will always reduce risk.B. Diversification works because some risks are not common to all assets.C. Diversification benefits occur most when the assets have a low correlation.D. The market is a completely diversified portfolio.E.

A diversified portfolio always has less risk than the highest risk asset assuming the correlation between the assets is less than one and the standard deviation of the assets is not the same.





44. A stock has an expected return of 14 percent and a standard deviation of 61 percent. What is the weight of the stock in the minimum variance portfolio consisting of the stock and the risk-free asset? A. .00B. .18C. .06D. .21E. .32



Topic: Minimum Variance Portfolio

45. The reason why a fully-diversified portfolio does not have zero risk is that some risk is: A. diversifiable.B. unrelated.C. not correlated.D. nondiversifiable.E. intrinsic.



Topic: Nondiversifiable Risk

46. As the probabilities associated with the expected returns of an asset change, the standard deviation of the asset will: A. increase.B. decrease.C. remain the same.D. increase or decrease.E. decrease if the expected return decreases.



Topic: Asset Standard Deviation

47. Which of the following statements is false regarding the investment opportunity set of two assets? A. If the correlation is + 1, it is a straight line.B. It graphically illustrates all possible portfolio combinations between the two assets.C. It is a straight line if one of the assets is risk-free.D. Assuming positive portfolio weights, it can never plot below the lowest expected return asset.E. It is not applicable when the assets have a zero correlation.



Topic: Investment Opportunity Set

48. A portfolio that plots below the minimum variance portfolio is __________. A. dominantB. inefficientC. correlatedD. optimalE. redundant



Topic: Inefficient Portfolios


49. Stock X has an expected return of 10 percent and a standard deviation of 38 percent. Stock Y has an expected return of 13 percent and a standard deviation of 48 percent. The weight of Stock X in the minimum variance portfolio of the two assets is __________ than the weight of Stock Y. A. greaterB. lessC. the sameD. less only if the correlation is negativeE. greater only if the correlation is positive




50. An asset on the Markowitz efficient frontier has: A. the greatest return for a given level of risk.B. less risk than the market.C. the greatest risk for a given level of return.D. a return greater than the market.E. A single asset cannot lie on the efficient frontier, only portfolios.


Level: EasySection: 2.5-The Markowitz Efficient Frontier

Topic: Efficient Frontier

51. In the analysis of the Markowitz efficient frontier, which of the following information is not needed? A. The correlation between every possible pair of assets.B. The weight of every asset.C. The expected rerun of every asset.D. The standard deviation of every asset.E. All of the above are needed.



Topic: Markowitz Analysis

52. Which of the following is false regarding the efficient frontier? A. A stock that lies above the efficient frontier is overvalued.B. The efficient frontier includes stocks, bonds, and all other assets.C. The efficient frontier may include individual stocks as well as portfolios.D. A bond can lie on the efficient frontier.E. All of the above are true.




53. The correlation between Stock A and Stock B is 0.40. The correlation between Stock A and Stock C is 0.20, and the correlation between Stock B and Stock C is 0.25. All else the same, which of the following portfolios will have the least risk? A. All invested in Stock A.B. All invested in Stock C.C. Equally invested in Stock A and Stock B.D. Equally invested in Stock B and Stock C.E. Equally invested in Stock A and Stock C.


Level: HardSection: 2.4-Correlation and Diversification



54. The market consists of two stocks. Stock F has an expected return of 9 percent and a standard deviation of 32 percent. Stock G has an expected return of 13 percent and a standard deviation of 50 percent. The correlation between the two stocks is -0.10. The efficient frontier is: A. the line between Stock F and Stock G.B. the line between the minimum variance portfolio and Stock F.C. the line between the minimum variance portfolio and Stock G.D. all to the right of Stock F on the risk/return graph.E. all to the right of Stock G on the risk/return graph.




55. Which of the following is true regarding the standard deviation for a portfolio? A. The portfolio's standard deviation must be less than the individual standard deviations.B. The standard deviation of the portfolio falls continuously as more assets are added.C. The standard deviation for a portfolio is a weighted average of individual standard deviations.D. All of the above.E. None of the above.




56. What is the possible correlation between a Bombardier stock with a standard deviation of 50 percent and a Treasury bill issued by Government of Canada? A. - 100B. - 1C. 0D. + 1E. + 100



Topic: Correlation

57. For the standard deviation of a minimum variance portfolio of two assets to be zero, the correlation between the assets must be __________. A. - 100B. - 1C. 0D. + 1E. + 100




58. What is the typical range of the variance of return for a stock portfolio? A. 0 to 1B. - 1 to + 1C. 0 to + 100D. Between the high and low values for the individual returns being usedE. No precise range exists



Topic: Variance


59. What is the risk premium of a stock that has an expected return of 14.2 percent if the risk-free rate is 5.7 percent? A. 9.4%B. 19.9%C. 7.5%D. 7.9%E. 8.5%

Risk premium = 14.2% - 5.7% = 8.5%



Topic: Risk Premium

60. What is the risk-free rate if there is a stock with a risk premium of 9.5 percent and the return of the stock is 19.9 percent? A. 29.4%B. 10.4%C. 2.1%D. 8.7%E. 12.5%

Risk-free rate = 19.9% - 9.5% = 10.4%



Topic: Risk Premium

61. What is the expected return of a stock with a risk premium of 7.6 percent if the risk-free rate is 4.8 percent? A. 12.4%B. 13.1%C. 11.3%D. 2.8%E. 11.7%

Expected return = 4.8% + 7.6% = 12.4%



Topic: Risk Premium

62. An investor has $800 invested in Stock X and $1,300 invested in Stock Y. What is the portfolio weight of Stock Y? A. 41%B. 38%C. 27%D. 33%E. 62%

WY = $1,300/($800 + $1,300) = $1,300/$2,100 = 0.61905





63. You have a portfolio with 200 shares of Stock A at a price of $34 and 300 shares of Stock B at a price of $28. What is the weight of Stock A in your portfolio? A. 55%B. 41%C. 45%D. 51%E. 37%

($34)(200)/[($34)(200) + ($28)(300)] = $6,800/$15,200 = 0.447368




Jordan - Chapter 02

64. What is the expected return of Stock R? A. 12.42%B. 14.11%C. 10.05%D. 13.10%E. 11.65%

(0.4)(32%) + (0.3)(10%) + (0.3)(- 9%) = 12.8% + 3% - 2.7% = 13.1%




65. What is the variance of Stock R? A. 0.0328B. 0.0416C. 0.0292D. 0.0375E. 0.0253

E(R) = (.4 × .32) + (.3 × .10) + (.3 × - .09) = .128 + .03 - .027 = .131Var = .4(.32 - .131)2 + .30(.10 - .131)2 + .3(- .09 - .131)2 = .0142884 + .0002883 + .0146523 = .029229



Topic: Variance


66. What is the standard deviation of Stock R? A. 17.10%B. 26.82%C. 21.85%D. 14.28%E. 23.43%

E(R) = (.4 × .32) + (.3 × .10) + (.3 × - .09) = .128 + .03 - .027 = .131Var = .4(.32 - .131)2 + .30(.10 - .131)2 + .3(-.09 - .131)2 = .0142884 + .0002883 + .0146523 = 0.029229Std. Dev. = (0.029229)0.5 = 0.170965



Topic: Standard Deviation

Jordan - Chapter 02

67. What is the expected return of Stock F? A. 10.67%B. 11.15%C. 10.10%D. 11.76%E. 10.86%

E(R) = (.30 × .65) + (.40 × .14) + (.30 × - .50) = .195 + .056 - .15 = .101




68. What is the variance of Stock F? A. 0.1994B. 0.1741C. 0.2217D. 0.1823E. 0.2074

Given E(R) = 0.101, Var = .30(.65 - .101)2 + .40(.14 - .101)2 + .30(- .50 - .101)2 = .0904203 + .0006084 + .1083603 = .199389



Topic: Variance


69. What is the standard deviation of Stock F? A. 50.86%B. 44.65%C. 41.37%D. 35.21%E. 23.06%

Std Dev = √.199389 = .44653 = 44.65 percent



Topic: Standard Deviation

70. If the risk-rate is 5.8 percent, what is the risk premium of Stock F? A. 15.9%B. 5.25%C. 4.87%D. 4.30%E. 5.06%

Risk premium = 10.1% - 5.8% = 4.3%



Topic: Risk Premium

Jordan - Chapter 02

71. What is the expected return of Stock P? A. 15.3%B. 10.9%C. 17.1%D. 14.4%E. 15.8%

(0.3)(20%) + (0.7)(12%) = 6% + 8.4% = 14.4%




72. What is the expected return of Stock Q? A. 12.3%B. 9.8%C. 10.9%D. 11.2%E. 8.5%

(0.3)(14%) + (0.7)(8%) = 4.2% + 5.6% = 9.8%





73. What is the expected return of a portfolio 60 percent invested in Stock P and the remainder in Stock Q? A. 14.30%B. 13.19%C. 15.17%D. 12.56%E. 10.66%

E(RBoom) = (.60 × .20) + (.40 × .14) = .12 + .056 = .176E(Rrecession) = (.60 × .12) + (.40 × .08) = .072 + .032 = .104E(RPort) = (.30 × .176) + (.70 × .104) = .0528 + .0728 = .1256 = 12.56 percent



Topic: Portfolio Expected Return

74. What is the standard deviation of a portfolio 60 percent invested in Stock P and the remainder in Stock Q? A. 5.88%B. 1.46%C. 4.27%D. 2.63%E. 3.30%

E(RBoom) = (.60 × .20) + (.40 × .14) = .12 + .056 = .176E(RRecession) = (.60 × .12) + (.40 × .08) = .072 + .032 = .104E(RPort) = (.3 × .176) + (.7 × .104) = .0528 + .0728 = .1256VarPort = .3(.176 - .1256)2 + .7(.104 - .1256)2 = .000762048 + .000326592 = .00108864

Std DevPort = √.00108864 = .0329945 = 3.30 percent




75. A portfolio is equally invested in two stocks. The standard deviations are 58% and 46%, respectively. If the correlation between the stocks is 0.24, what is the variance of the portfolio? A. 0.1690B. 0.2382C. 0.1813D. 0.2489E. 0.2046





76. Stock J has a standard deviation of 67 percent, and Stock K has a standard deviation of 51 percent. The correlation between the two stocks is -0.10. What is the variance of a portfolio of the two assets with 35 percent invested in Stock J? A. 0.1026B. 0.2318C. 0.1653D. 0.1493E. 0.1986





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