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Exam 6: Efficient Diversification

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Question 41

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The expected rate of return of a portfolio of risky securities is ________.

A) the sum of the securities' covariance
B) the sum of the securities' variance
C) the weighted sum of the securities' expected returns
D) the weighted sum of the securities' variance

E) A) and B)
F) All of the above

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Question 42

Multiple Choice

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According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of ________ and ________.

A) identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs
B) identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile
C) identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion
D) choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

E) A) and D)
F) None of the above

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Question 43

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Diversification can reduce or eliminate ________ risk.

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ________.

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is ________.

The term excess return refers to ________.

The values of beta coefficients of securities are ________.

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and B is 20% and 10% respectively. The standard deviation of return on the minimum-variance portfolio is ________.

Which of the following statistics cannot be negative?

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________ sensitive to changes in the market than are the returns of stock B.

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________.

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

The ________ reward-to-variability ratio is found on the ________ capital market line.

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and B is 20% and 10% respectively. The expected return on the minimum-variance portfolio is approximately ________.

Beta is a measure of security responsiveness to ________.

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.