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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}\text { State of the Economy } & \text { Probability } & E(R) \\\text { Boom } & .25 & 15 \% \\\text { Normal } & .75 & 8 \%\end{array}


A) 5.25
B) 5.79
C) 6.25
D) 9.19
E) 10.50

F) A) and E)
G) B) and E)

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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? StateProbAB Boom .2015%9% Normal .808%20%\begin{array}{lrrr}\text {State}&\text {Prob}&\text {A}&\text {B}\\\text { Boom } & .20 & 15 \% & 9\% \\\text { Normal } & .80 & 8 \% & 20\%\end{array}


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

F) All of the above
G) None of the above

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Correlation is the:


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) B) and D)
G) All of the above

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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 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 .210%3%\begin{array}{lllr}\text { State of the Economy } & \text { Probability } &\text {E(R) }_{A}&\text { E(R) }_{B}\\\text { Weight }&&60\%&40\%\\\\\text { Boom }&.2&20\%&15\%\\\text { Normal } & .6 & 12\% &8 \% \\\text { Recegsion } & .2& -10 \% & 3\%\end{array}


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

F) B) and C)
G) B) and D)

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


A) perfectly positive
B) positive
C) negative
D) perfectly negative
E) uncorrelated

F) A) and D)
G) B) and C)

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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 .4012%44%\begin{array} { l c c c } \text { State of the Economy } & \text { Probability } & \text { A } &\text { B } \\\text { Boom } & .60 & 12\%& 22\% \\\text { Normal } & .40 & - 12 \%& - 44\%\end{array}


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

F) C) and D)
G) B) and C)

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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


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 IV

F) A) and B)
G) None of the above

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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:


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

F) B) and C)
G) A) and D)

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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?


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

F) B) and C)
G) D) and E)

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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}\text { State of the Economy } & \text { Probability } & E(R) \\\text { Boom } & .35 & 18 \% \\\text { Recession } & .65 & 8\%\end{array}


A) 18.75%
B) 22.75%
C) 31.53%
D) 48.97%
E) 50.03%

F) B) and D)
G) B) and C)

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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?


A) .311
B) .390
C) .408
D) .610
E) .649

F) A) and B)
G) A) and C)

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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?


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 market

F) A) and E)
G) B) and C)

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


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

F) None of the above
G) All of the above

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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?


A) −1.0
B) −.5
C) 0
D) .5
E) 1.0

F) None of the above
G) A) and B)

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What is the expected return on this stock given the following information?  State of the Economy  Probability E(R)   Boom .2520% Normal .5515% Recession .2012%\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}


A) 9.36%
B) 9.74%
C) 10.85%
D) 11.78%
E) 12.05%

F) A) and D)
G) A) and E)

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Which one of the following statements is correct?


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) C) and D)
G) A) and C)

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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


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

F) B) and E)
G) B) and D)

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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?


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

F) D) and E)
G) A) and E)

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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?


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

F) C) and D)
G) A) and E)

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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}\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}


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

F) C) and D)
G) A) and B)

Correct Answer

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