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.
Trang 1E 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 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
4 The reduction in risk realized when a portfolio is invested in a variety of assets is called
7 The manner in which an investor spreads his portfolio across a variety of securities is called
A The efficient frontier
Trang 28 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
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
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
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
Trang 314 Which of the following portfolio values are weighted average?
A Add up the returns on each stock and divide by 6
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
Trang 421 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
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
Trang 526 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
E negative infinity; positive infinity
29 All else the same, a correlation of will result in the least diversification benefits
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 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
Trang 634 If the correlation between two assets is , all risk can be eliminated in a portfolio
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 = 9 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 = 9 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
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
Trang 742 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 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
Trang 849 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 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
Trang 956 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?
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?
Trang 1063 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?
Trang 1170 If the risk-rate is 5.8 percent, what is the risk premium of Stock F?
Trang 1277 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?
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?
Trang 1383 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?
Trang 1489 Consider the following correlation coefficient for stocks M, N, P and Q Which portfolio will have the least diversification benefit?
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
Trang 1595 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
Trang 16Topic: Expected Return
2 A combination of assets held by an investor is known as a(n)
3 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
Jordan - Chapter 02 #3 Level: Medium Section: 2.2-Portfolios Topic: Portfolio Weights
4 The reduction in risk realized when a portfolio is invested in a variety of assets is called
Topic: Correlation