Question 1

Which of the following affect the expected rate of return for a portfolio?
I. weight of each security held in the portfolio
II. the probability of various economic states occurring
III. the variance of each individual security
IV. the expected rate of return of each security given each economic state

Accepted Answer

A)  I and IV only
B)  II and IV only
C)  II, III, and IV only
D)  I, II, and IV only
E)  I, II, III, and IVF) A) and D)
G) A) and C)

Question 2

Correlation is the:

Accepted Answer

A)  squared measure of a security's total risk.
B)  extent to which the returns on two assets move together.
C)  measurement of the systematic risk contained in an asset.
D)  daily return on an asset compared to its previous daily return.
E)  spreading of an investment across a number of assets.F) C) and D)
G) B) and E)

Question 3

Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero?

Accepted Answer

A)  −1.0
B)  −.5
C)  0
D)  .5
E)  1.0F) A) and E)
G) None of the above

Question 4

Which one of the following correlation relationships has the potential to completely eliminate risk?

Accepted Answer

A)  perfectly positive
B)  positive
C)  negative
D)  perfectly negative
E)  uncorrelatedF) B) and C)
G) All of the above

Question 5

Which of the following will increase the expected risk premium for a security, all else constant?
I. an increase in the security's expected return
II. a decrease in the security's expected return
III. an increase in the risk-free rate
IV. a decrease in the risk-free rate

Accepted Answer

A)  I only
B)  III only
C)  IV only
D)  I and IV only
E)  II and III onlyF) A) and C)
G) A) and E)

Question 6

What is the expected return on this stock given the following information?
  State of the Economy  Probability E(R)   Boom .2520% Normal .5515% Recession .20−12%\begin{array}{lcc}	ext { State of the Economy }&	ext { Probability}&	ext { E(R)  }\	ext { Boom } & .25 & 20\% \	ext { Normal } & .55 & 15\% \	ext { Recession } & .20 & -12 \%\end{array} State of the Economy  Boom  Normal  Recession ​ Probability.25.55.20​ E(R)  20%15%−12%​

Accepted Answer

A)  9.36%
B)  9.74%
C)  10.85%
D)  11.78%
E)  12.05% F) All of the above
G) B) and C)

Question 7

You have a portfolio which is comprised of 60% of Stock A and 40% of Stock B. What is the expected rate of return on this portfolio?
 StateProbAB Boom .2015%9% Normal .808%20%\begin{array}{lrrr}	ext {State}&	ext {Prob}&	ext {A}&	ext {B}\	ext { Boom } & .20 & 15 \% & 9\% \	ext { Normal } & .80 & 8 \% & 20\%\end{array}State Boom  Normal ​Prob.20.80​A15%8%​B9%20%​

Accepted Answer

A)  12.76%
B)  12.88%
C)  13.44%
D)  13.56%
E)  13.85% F) A) and E)
G) B) and C)

Question 8

Which one of the following statements is correct?

Accepted Answer

A)  A portfolio variance is a weighted average of the variances of the individual securities which comprise the portfolio.
B)  A portfolio variance is dependent upon the portfolio's asset allocation.
C)  A portfolio variance is unaffected by the correlations between the individual securities held in the portfolio.
D)  The portfolio variance must be greater than the lowest variance of any of the securities held in the portfolio.
E)  The portfolio variance must be less than the lowest variance of any of the securities held in the portfolio.F) D) and E)
G) B) and E)

Question 9

What is the variance of the expected returns on this stock?
  State of the Economy  Probability E(R)  Boom .3518% Recession .658%\begin{array}{lcr}	ext { State of the Economy } & 	ext { Probability } & E(R)  \	ext { Boom } & .35 & 18 \% \	ext { Recession } & .65 & 8\%\end{array} State of the Economy  Boom  Recession ​ Probability .35.65​E(R) 18%8%​

Accepted Answer

A)  18.75%
B)  22.75%
C)  31.53%
D)  48.97%
E)  50.03% F) None of the above
G) A) and B)

Question 10

You have a portfolio which is comprised of 60% of Stock A and 40% of Stock B. What is the expected return on this portfolio?
  State of the Economy  Probability E(R) A E(R) B Weight 60%40% Boom .220%15% Normal .612%8% Recegsion .2−10%3%\begin{array}{lllr}	ext { State of the Economy } & 	ext { Probability } &	ext {E(R) }_{A}&	ext { E(R) }_{B}\	ext { Weight }&&60\%&40\%\\	ext { Boom }&.2&20\%&15\%\	ext { Normal } & .6 & 12\% &8 \% \	ext { Recegsion } & .2& -10 \% & 3\%\end{array} State of the Economy  Weight  Boom  Normal  Recegsion ​ Probability .2.6.2​E(R) A​60%20%12%−10%​ E(R) B​40%15%8%3%​

Accepted Answer

A)  7.30%
B)  7.58%
C)  8.03%
D)  8.88%
E)  9.40% F) A) and B)
G) A) and C)

Question 11

You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?

Accepted Answer

A)  weighted average return given the multiple states of the economy
B)  rate of return for a given economic state
C)  variance of the returns given the multiple states of the economy
D)  correlation between the returns given the various states of the economy
E)  correlation of the weighted average return as compared to the marketF) C) and D)
G) B) and D)

Question 12

You have a portfolio that is comprised of 72% of Stock A and 28% of Stock B. What is the variance of this portfolio?
  State of the Economy  Probability  A  B  Boom .6012%22% Normal .40−12%−44%\begin{array} { l c c c } 	ext { State of the Economy } & 	ext { Probability } & 	ext { A } &	ext { B }  \	ext { Boom } & .60 & 12\%& 22\% \	ext { Normal } & .40 & - 12 \%& - 44\%\end{array} State of the Economy  Boom  Normal ​ Probability .60.40​ A 12%−12%​ B 22%−44%​

Accepted Answer

A)  190.9%
B)  203.8%
C)  268.1%
D)  290.9%
E)  306.9% F) A) and E)
G) A) and D)

Question 13

What is the variance of the expected returns on this stock?
  State of the Economy  Probability E(R)  Boom .2515% Normal .758%\begin{array}{lcr}	ext { State of the Economy } & 	ext { Probability } & E(R)  \	ext { Boom } & .25 & 15 \% \	ext { Normal } & .75 & 8 \%\end{array} State of the Economy  Boom  Normal ​ Probability .25.75​E(R) 15%8%​

Accepted Answer

A)  5.25
B)  5.79
C)  6.25
D)  9.19
E)  10.50 F) B) and C)
G) A) and E)

Question 14

What is the variance of the expected returns on this stock?
  State of the Economy  Probability of  Rate of Return if  State of Economy  state occurs  Boom .4015% Normal .6019%\begin{array}{lrr}	ext { State of the Economy } & 	ext { Probability of } & 	ext { Rate of Return if } \& 	ext { State of Economy } & 	ext { state occurs }\	ext { Boom } & .40& 15\% \	ext { Normal } & .60 &19 \%\end{array} State of the Economy  Boom  Normal ​ Probability of  State of Economy .40.60​ Rate of Return if  state occurs 15%19%​

Accepted Answer

A)  1.21%
B)  1.42%
C)  1.56%
D)  3.84%
E)  4.03% F) A) and B)
G) A) and E)

Question 15

Stock X has a standard deviation of 21% per year and Stock Y has a standard deviation of 6% per year. The correlation between Stock A and Stock B is .38. You have a portfolio of these two stocks wherein Stock X has a portfolio weight of 42%. What is your portfolio standard deviation?

Accepted Answer

A)  8.89%
B)  9.85%
C)  10.64%
D)  11.84%
E)  12.92%F) C) and D)
G) A) and E)

Question 16

A stock fund has a standard deviation of 28% and a bond fund has a standard deviation of 16%. The correlation of the two funds is .15. What is the approximate weight of the stock fund in the minimum variance portfolio?

Accepted Answer

A)  11%
B)  15%
C)  21%
D)  24%
E)  27%F) A) and D)
G) C) and D)

Question 17

The principal of diversification involves investing in a variety of assets with which one of the following being the primary goal?

Accepted Answer

A)  increasing returns
B)  minimizing taxes
C)  reducing some of the risk
D)  eliminating all of the risk
E)  increasing the varianceF) C) and D)
G) B) and D)

Question 18

You own a stock which is expected to return 14% in a booming economy and 9% in a normal economy. If the probability of a booming economy decreases, your expected return will:

Accepted Answer

A)  decrease.
B)  either remain constant or decrease.
C)  remain constant.
D)  increase.
E)  either remain constant or increase.F) A) and B)
G) B) and C)

Question 19

Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $95,300. Stock X is worth $65,700. What is the portfolio weight of Stock Y?

Accepted Answer

A)  .311
B)  .390
C)  .408
D)  .610
E)  .649F) A) and E)
G) All of the above

Question 20

The value of an individual security divided by the total value of the portfolio is referred to as the portfolio:

Accepted Answer

A)  beta.
B)  standard deviation.
C)  balance.
D)  weight.
E)  variance.F) A) and B)
G) A) and E)

Exam 11: Diversification and Risky Asset Allocation

What is the variance of the expected returns on this stock? $\begin{array}{lcr}\text { State of the Economy } & \text { Probability } & E(R) \\\text { Boom } & .25 & 15 \% \\\text { Normal } & .75 & 8 \%\end{array}$

Correct Answer
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You have a portfolio which is comprised of 60% of Stock A and 40% of Stock B. What is the expected rate of return on this portfolio? $\begin{array}{lrrr}\text {State}&\text {Prob}&\text {A}&\text {B}\\\text { Boom } & .20 & 15 \% & 9\% \\\text { Normal } & .80 & 8 \% & 20\%\end{array}$

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Correlation is the:

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Which one of the following correlation relationships has the potential to completely eliminate risk?

Correct Answer
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You own a stock which is expected to return 14% in a booming economy and 9% in a normal economy. If the probability of a booming economy decreases, your expected return will:

Correct Answer
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A stock fund has a standard deviation of 28% and a bond fund has a standard deviation of 16%. The correlation of the two funds is .15. What is the approximate weight of the stock fund in the minimum variance portfolio?

Correct Answer
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What is the variance of the expected returns on this stock? $\begin{array}{lcr}\text { State of the Economy } & \text { Probability } & E(R) \\\text { Boom } & .35 & 18 \% \\\text { Recession } & .65 & 8\%\end{array}$

Correct Answer
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Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $95,300. Stock X is worth $65,700. What is the portfolio weight of Stock Y?

Correct Answer
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You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?

Correct Answer
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The value of an individual security divided by the total value of the portfolio is referred to as the portfolio:

Correct Answer
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Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero?

Correct Answer
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What is the expected return on this stock given the following information? $\begin{array}{lcc}\text { State of the Economy }&\text { Probability}&\text { E(R) }\\\text { Boom } & .25 & 20\% \\\text { Normal } & .55 & 15\% \\\text { Recession } & .20 & -12 \%\end{array}$

Correct Answer
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Which one of the following statements is correct?

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Which of the following will increase the expected risk premium for a security, all else constant? I. an increase in the security's expected return II. a decrease in the security's expected return III. an increase in the risk-free rate IV. a decrease in the risk-free rate

Correct Answer
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Stock X has a standard deviation of 21% per year and Stock Y has a standard deviation of 6% per year. The correlation between Stock A and Stock B is .38. You have a portfolio of these two stocks wherein Stock X has a portfolio weight of 42%. What is your portfolio standard deviation?

Correct Answer
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The principal of diversification involves investing in a variety of assets with which one of the following being the primary goal?

Correct Answer
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What is the variance of the expected returns on this stock? $\begin{array}{lrr}\text { State of the Economy } & \text { Probability of } & \text { Rate of Return if } \\& \text { State of Economy } & \text { state occurs }\\\text { Boom } & .40& 15\% \\\text { Normal } & .60 &19 \%\end{array}$

Correct Answer
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Exam 11: Diversification and Risky Asset Allocation

Correct AnswerverifiedShow Answer

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Correlation is the:

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Which one of the following correlation relationships has the potential to completely eliminate risk?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You own a stock which is expected to return 14% in a booming economy and 9% in a normal economy. If the probability of a booming economy decreases, your expected return will:

Correct AnswerverifiedShow Answer

A stock fund has a standard deviation of 28% and a bond fund has a standard deviation of 16%. The correlation of the two funds is .15. What is the approximate weight of the stock fund in the minimum variance portfolio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $95,300. Stock X is worth $65,700. What is the portfolio weight of Stock Y?

Correct AnswerverifiedShow Answer

You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?

Correct AnswerverifiedShow Answer

The value of an individual security divided by the total value of the portfolio is referred to as the portfolio:

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Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero?

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Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

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Which of the following will increase the expected risk premium for a security, all else constant? I. an increase in the security's expected return II. a decrease in the security's expected return III. an increase in the risk-free rate IV. a decrease in the risk-free rate

Correct AnswerverifiedShow Answer

Stock X has a standard deviation of 21% per year and Stock Y has a standard deviation of 6% per year. The correlation between Stock A and Stock B is .38. You have a portfolio of these two stocks wherein Stock X has a portfolio weight of 42%. What is your portfolio standard deviation?

Correct AnswerverifiedShow Answer

The principal of diversification involves investing in a variety of assets with which one of the following being the primary goal?

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