02 Student: _ The return is the average projected return of an asset in different states of the economy A Variable B Realized C Portfolio D Expected E Potential A combination of assets held by an investor is known as a(n) A Opportunity set B Efficient asset C Markowitz selection D Portfolio E Minimum variance option The portfolio weight of an asset is the A Market value of that asset expressed as a percentage of the asset's initial cost B Market value of that asset expressed as a percentage of the total portfolio value C Cost invested in that asset expressed as a percentage of the total cost of the portfolio D Number of shares held in that asset divided by the total number of shares owned E Return on the asset as a fraction of the entire return on the portfolio The reduction in risk realized when a portfolio is invested in a variety of assets is called A Stock selection B Diversification C Correlation D Stock management E Opportunity investing is the extent to which the returns on two assets move together A Standard deviation B Variance C Correlation D Efficiency E Tangency is a statistical measure of the degree to which two variables (e.g securities' returns) move together A Covariance B Variance C Skewness D Coefficient of variation E Tangency The manner in which an investor spreads his portfolio across a variety of securities is called A The efficient frontier B Correlation C Minimization D Asset allocation E The investment opportunity set All possible risk-return combinations available from portfolios consisting of different group of assets are the A efficient frontier B investment opportunity set C portfolio set D correlation E capital asset pricing model 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 Diversified B Market C Efficient D Stock E Opportunity 10 The Markowitz efficient frontier is defined as the A Entire set of efficient portfolios given varying levels of risk B Highest level of return that can be obtained given any combination of tow individual assets C Single most efficient portfolio that can be generated from two individual assets D Total possible risk-return combination that can be generated from two individual assets E 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 premium B Diversification benefit C Expected return D Portfolio adjustment E 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 economy B The summation of the probabilities of the various economic states must equal to 10 C The majority of stock returns increase as the state of the economy worsens D 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 year B Most stocks tend to have the same return regardless of the economic state C The expected state of the economy can have a major impact on the expected return on a portfolio D 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 return II) Standard deviation III) Correlation IV) Beta A I and III B I and IV C II and III D II and IV E 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 B 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 position E 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 rate B Subtracting the expected market return from the security's expected return C Subtracting the risk-free rate from the security's expected return D Adding the security's expected return to the risk-free rate E 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 Zero B The risk-free rate C The market rate D The market rate minus the risk-free rate E The risk-free rate plus one-half of the market rate 20 Variance is a measure of A Return B Risk C Correlation D Diversification E Efficiency 21 All else constant, the risk premium on a security will decrease when the I) security's expected return increases II) security's expected return decreases III) risk-free rate increases IV) risk-free rate decreases A I B II C I and III D I and IV E 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 deviation B Coefficient of variation C Standard means D Covariance E 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 portfolio II) return of each security given a particular economic state III) portfolio weight assigned to each security IV) probability of each economic state occurring A II and III B II and Iv C I, II and III D II, III and Iv E 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 negative B Be less than C Be greater than D Be equal to E Be equal to 26 As the number of stocks in a portfolio increases, the portfolio standard deviation A Increases at a diminishing rate B Increases at an increasing rate C Decreases at a diminishing rate D Remains unchanged E 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 Market B Diversifiable C Non-diversifiable D Inefficient E Efficient 28 The minimum correlation is and the maximum correlation is A - 1; B - 1; + C ; + D - 100; +100 E negative infinity; positive infinity 29 All else the same, a correlation of will result in the least diversification benefits A - 100 B - C D + E + 100 30 Two assets with a correlation coefficient of -1 A Will both have increasing returns at the same time B Will both have decreasing returns at the same time C Will have increasing returns for one when there are decreasing returns for the other D Will have decreasing returns in an economic boom E Will have increasing returns in an economic recession 31 A correlation coefficient of indicates a perfect positive correlation A B 0.5 C D 10 E 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 - B - 0.5 C D + 0.5 E + 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 - 100 B - C D + E + 100 35 The greater the variance of a portfolio, A The less certain the actual return B The lower the level of risk C The lower the expected return D The smaller the standard deviation E 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 percent B Expected return = 12 percent; Standard deviation = 49 percent C Expected return = percent; Standard deviation = 41 percent D Expected return = 14 percent; Standard deviation = 51 percent E 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 percent B Expected return = 13 percent; Standard deviation = 45 percent C Expected return = percent; Standard deviation = 36 percent D Expected return = 11 percent; Standard deviation = 47 percent E 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: higher B higher; lower C lower; lower D lower; higher E 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 EA 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 .00 B .18 C .06 D .21 E .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 dominant B inefficient C correlated D optimal E 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 greater B less C the same D less only if the correlation is negative E 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 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 - 100 B - C D + E + 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 - 100 B - C D + E + 100 58 What is the typical range of the variance of return for a stock portfolio? A to B - to + C to + 100 D Between the high and low values for the individual returns being used E 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 0.0328 B 0.0416 C 0.0292 D 0.0375 E 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 0.1994 B 0.1741 C 0.2217 D 0.1823 E 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% 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 B 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 position E Multiply the individual returns with the weights based on the number of shares of each stock owned Jordan - Chapter 02 #15 Level: Easy Section: 2.2-Portfolios Topic: 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 Jordan - Chapter 02 #16 Level: Medium Section: 2.1-Expected Returns and Variances Topic: Expected Return 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 Jordan - Chapter 02 #17 Level: Medium Section: 2.1-Expected Returns and Variances Topic: Expected Return 18 The expected risk premium on a security is computed by A Subtracting the security's expected return from the risk-free rate B Subtracting the expected market return from the security's expected return C Subtracting the risk-free rate from the security's expected return D Adding the security's expected return to the risk-free rate E Adding the security's expected return to the expected return on the market Jordan - Chapter 02 #18 Level: Easy Section: 2.1-Expected Returns and Variances 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 Zero B The risk-free rate C The market rate D The market rate minus the risk-free rate E The risk-free rate plus one-half of the market rate Jordan - Chapter 02 #19 Level: Medium Section: 2.1-Expected Returns and Variances Topic: Risk Premium 20 Variance is a measure of A Return B Risk C Correlation D Diversification E Efficiency Jordan - Chapter 02 #20 Level: Easy Section: 2.2-Portfolios Topic: Variance 21 All else constant, the risk premium on a security will decrease when the I) security's expected return increases II) security's expected return decreases III) risk-free rate increases IV) risk-free rate decreases A I B II C I and III D I and IV E II and III Jordan - Chapter 02 #21 Level: Medium Section: 2.1-Expected Returns and Variances 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 deviation B Coefficient of variation C Standard means D Covariance E Histogram Jordan - Chapter 02 #22 Level: Easy Section: 2.3-Diversification and Portfolio Risk Topic: Diversification 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 Jordan - Chapter 02 #23 Level: Hard Section: 2.3-Diversification and Portfolio Risk Topic: Diversification 24 The expected return on a portfolio is affected by the I) choice of securities held in the portfolio II) return of each security given a particular economic state III) portfolio weight assigned to each security IV) probability of each economic state occurring A II and III B II and Iv C I, II and III D II, III and Iv E I, II, III and IV Jordan - Chapter 02 #24 Level: Medium Section: 2.2-Portfolios 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 negative B Be less than C Be greater than D Be equal to E Be equal to Jordan - Chapter 02 #25 Level: Medium Section: 2.2-Portfolios Topic: Portfolio Variance 26 As the number of stocks in a portfolio increases, the portfolio standard deviation A Increases at a diminishing rate B Increases at an increasing rate C Decreases at a diminishing rate D Remains unchanged E Decreases at an increasing rate Jordan - Chapter 02 #26 Level: Hard Section: 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 Market B Diversifiable C Non-diversifiable D Inefficient E Efficient Jordan - Chapter 02 #27 Level: Easy Section: 2.4-Correlation and Diversification Topic: Diversifiable Risk 28 The minimum correlation is and the maximum correlation is A - 1; B - 1; + C ; + D - 100; +100 E negative infinity; positive infinity Jordan - Chapter 02 #28 Level: Easy Section: 2.4-Correlation and Diversification Topic: Correlation 29 All else the same, a correlation of will result in the least diversification benefits A - 100 B - C D + E + 100 Jordan - Chapter 02 #29 Level: Medium Section: 2.4-Correlation and Diversification Topic: Correlation 30 Two assets with a correlation coefficient of -1 A Will both have increasing returns at the same time B Will both have decreasing returns at the same time C Will have increasing returns for one when there are decreasing returns for the other D Will have decreasing returns in an economic boom E Will have increasing returns in an economic recession Jordan - Chapter 02 #30 Level: Medium Section: 2.4-Correlation and Diversification Topic: Correlation 31 A correlation coefficient of indicates a perfect positive correlation A B 0.5 C D 10 E 100 Jordan - Chapter 02 #31 Level: Easy Section: 2.4-Correlation and Diversification 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 - B - 0.5 C D + 0.5 E + Jordan - Chapter 02 #32 Level: Medium Section: 2.4-Correlation and Diversification 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 Jordan - Chapter 02 #33 Level: Medium Section: 2.4-Correlation and Diversification Topic: Correlation 34 If the correlation between two assets is , all risk can be eliminated in a portfolio A - 100 B - C D + E + 100 Jordan - Chapter 02 #34 Level: Easy Section: 2.4-Correlation and Diversification Topic: Correlation 35 The greater the variance of a portfolio, A The less certain the actual return B The lower the level of risk C The lower the expected return D The smaller the standard deviation E The greater the number of individual securities held Jordan - Chapter 02 #35 Level: Medium Section: 2.2-Portfolios Topic: Portfolio Variance 36 Which of the following assets cannot lie on the Markowitz efficient frontier? A Expected return = 10 percent; Standard deviation = 38 percent B Expected return = 12 percent; Standard deviation = 49 percent C Expected return = percent; Standard deviation = 41 percent D Expected return = 14 percent; Standard deviation = 51 percent E All of the assets could lie on the Markowitz efficient frontier Jordan - Chapter 02 #36 Level: Hard Section: 2.5-The Markowitz Efficient Frontier Topic: Markowitz Efficient Frontier 37 Which of the following assets cannot lie on the Markowitz efficient frontier? A Expected return = 16 percent; Standard deviation = 62 percent B Expected return = 13 percent; Standard deviation = 45 percent C Expected return = percent; Standard deviation = 36 percent D Expected return = 11 percent; Standard deviation = 47 percent E All of the assets could lie on the Markowitz efficient frontier Jordan - Chapter 02 #37 Level: Hard Section: 2.5-The Markowitz Efficient Frontier Topic: 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: higher B higher; lower C lower; lower D lower; higher E Insufficient information Jordan - Chapter 02 #38 Level: Medium Section: 2.5-The Markowitz Efficient Frontier Topic: 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 Jordan - Chapter 02 #39 Level: Medium Section: 2.3-Diversification and Portfolio Risk Topic: Diversification 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 Jordan - Chapter 02 #40 Level: Medium Section: 2.3-Diversification and Portfolio Risk Topic: Diversification 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 Jordan - Chapter 02 #41 Level: Medium Section: 2.1-Expected Returns and Variances 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' Jordan - Chapter 02 #42 Level: Hard Section: 2.5-The Markowitz Efficient Frontier 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 Jordan - Chapter 02 #43 Level: Medium Section: 2.3-Diversification and Portfolio Risk Topic: Diversification 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 B C D E .00 18 06 21 32 Jordan - Chapter 02 #44 Level: Hard Section: 2.5-The Markowitz Efficient Frontier 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 Jordan - Chapter 02 #45 Level: Easy Section: 2.4-Correlation and Diversification 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 Jordan - Chapter 02 #46 Level: Medium Section: 2.2-Portfolios 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 Jordan - Chapter 02 #47 Level: Medium Section: 2.4-Correlation and Diversification Topic: Investment Opportunity Set 48 A portfolio that plots below the minimum variance portfolio is A dominant B inefficient C correlated D optimal E redundant Jordan - Chapter 02 #48 Level: Easy Section: 2.4-Correlation and Diversification 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 greater B less C the same D less only if the correlation is negative E greater only if the correlation is positive Jordan - Chapter 02 #49 Level: Medium Section: 2.4-Correlation and Diversification Topic: Minimum Variance Portfolio 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 Jordan - Chapter 02 #50 Level: Easy Section: 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 B C D E The correlation between every possible pair of assets The weight of every asset The expected rerun of every asset The standard deviation of every asset All of the above are needed Jordan - Chapter 02 #51 Level: Hard Section: 2.5-The Markowitz Efficient Frontier 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 Jordan - Chapter 02 #52 Level: Hard Section: 2.5-The Markowitz Efficient Frontier Topic: Efficient Frontier 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 Jordan - Chapter 02 #53 Level: Hard Section: 2.4-Correlation and Diversification Topic: Diversification 54 The market consists of two stocks Stock F has an expected return of 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 Jordan - Chapter 02 #54 Level: Hard Section: 2.5-The Markowitz Efficient Frontier Topic: Efficient Frontier 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 Jordan - Chapter 02 #55 Level: Hard Section: 2.2-Portfolios Topic: Portfolio Standard Deviation 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 - 100 B - C D + E + 100 Jordan - Chapter 02 #56 Level: Medium Section: 2.4-Correlation and Diversification 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 - 100 B - C D + E + 100 Jordan - Chapter 02 #57 Level: Medium Section: 2.4-Correlation and Diversification Topic: Minimum Variance Portfolio 58 What is the typical range of the variance of return for a stock portfolio? A to B - to + C to + 100 D Between the high and low values for the individual returns being used E No precise range exists Jordan - Chapter 02 #58 Level: Medium Section: 2.2-Portfolios 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% Jordan - Chapter 02 #59 Level: Easy Section: 2.1-Expected Returns and Variances 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% Jordan - Chapter 02 #60 Level: Easy Section: 2.1-Expected Returns and Variances 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% Jordan - Chapter 02 #61 Level: Easy Section: 2.1-Expected Returns and Variances 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 Jordan - Chapter 02 #62 Level: Easy Section: 2.2-Portfolios Topic: Portfolio Weights 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 #63 Level: Easy Section: 2.2-Portfolios Topic: Portfolio Weights 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% Jordan - Chapter 02 #64 Level: Medium Section: 2.1-Expected Returns and Variances Topic: Expected Return 65 What is the variance of Stock R? A 0.0328 B 0.0416 C 0.0292 D 0.0375 E 0.0253 E(R) = (.4 × 32) + (.3 × 10) + (.3 × - 09) = 128 + 03 - 027 = 131 Var = 4(.32 - 131)2 + 30(.10 - 131)2 + 3(- 09 - 131)2 = 0142884 + 0002883 + 0146523 = 029229 Jordan - Chapter 02 #65 Level: Medium Section: 2.2-Portfolios 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 = 131 Var = 4(.32 - 131)2 + 30(.10 - 131)2 + 3(-.09 - 131)2 = 0142884 + 0002883 + 0146523 = 0.029229 Std Dev = (0.029229)0.5 = 0.170965 Jordan - Chapter 02 #66 Level: Medium Section: 2.2-Portfolios 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 Jordan - Chapter 02 #67 Level: Medium Section: 2.1-Expected Returns and Variances Topic: Expected Return 68 What is the variance of Stock F? A 0.1994 B 0.1741 C 0.2217 D 0.1823 E 0.2074 Given E(R) = 0.101, Var = 30(.65 - 101)2 + 40(.14 - 101)2 + 30(- 50 - 101)2 = 0904203 + 0006084 + 1083603 = 199389 Jordan - Chapter 02 #68 Level: Medium Section: 2.2-Portfolios 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 Jordan - Chapter 02 #69 Level: Medium Section: 2.2-Portfolios 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% Jordan - Chapter 02 #70 Level: Easy Section: 2.1-Expected Returns and Variances 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% Jordan - Chapter 02 #71 Level: Easy Section: 2.1-Expected Returns and Variances Topic: Expected Return 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% Jordan - Chapter 02 #72 Level: Easy Section: 2.1-Expected Returns and Variances Topic: Expected Return 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 = 176 E(Rrecession) = (.60 × 12) + (.40 × 08) = 072 + 032 = 104 E(RPort) = (.30 × 176) + (.70 × 104) = 0528 + 0728 = 1256 = 12.56 percent Jordan - Chapter 02 #73 Level: Medium Section: 2.2-Portfolios 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 = 176 E(RRecession) = (.60 × 12) + (.40 × 08) = 072 + 032 = 104 E(RPort) = (.3 × 176) + (.7 × 104) = 0528 + 0728 = 1256 VarPort = 3(.176 - 1256)2 + 7(.104 - 1256)2 = 000762048 + 000326592 = 00108864 Std DevPort = √.00108864 = 0329945 = 3.30 percent Jordan - Chapter 02 #74 Level: Hard Section: 2.2-Portfolios Topic: Portfolio Standard Deviation 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 0.1690 B 0.2382 C 0.1813 D 0.2489 E 0.2046 Jordan - Chapter 02 #75 Level: Medium Section: 2.2-Portfolios Topic: Portfolio Variance 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 0.1026 B 0.2318 C 0.1653 D 0.1493 E 0.1986 Jordan - Chapter 02 #76 Level: Medium Section: 2.2-Portfolios Topic: Portfolio Variance ... 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... 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... 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