# FIN 320 Week 4 Quiz 3 Chapter 5 and 6 – Strayer University NEW

FIN 320 Week 4 Quiz – Strayer

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Chapter 5: ___________________________________________________________________________
1. You put up \$50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of \$3.50. Your HPR was ____.

A. 4%

B. 3.5%

C. 7%

D. 11%

2. The ______ measure of returns ignores compounding.

A. geometric average

B. arithmetic average

C. IRR

D. dollar-weighted

3. If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.

A. geometric average return

B. arithmetic average return

C. dollar-weighted return

D. index return

4. Which one of the following measures time-weighted returns and allows for compounding?

A. Geometric average return

B. Arithmetic average return

C. Dollar-weighted return

D. Historical average return

5. Rank the following from highest average historical return to lowest average historical return from 1926 to 2010.

I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills

A. I, II, III, IV

B. III, IV, II, I

C. I, III, II, IV

D. III, I, II, IV

6. Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010.

I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills

A. I, II, III, IV

B. III, IV, II, I

C. I, III, II, IV

D. III, I, II, IV

7. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.

A. dollar-weighted return

B. geometric average return

C. arithmetic average return

D. index return

8. The complete portfolio refers to the investment in _________.

A. the risk-free asset

B. the risky portfolio

C. the risk-free asset and the risky portfolio combined

D. the risky portfolio and the index

9. You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?

A. Dollar-weighted return

B. Geometric average return

C. Arithmetic average return

D. Index return

10. The holding period return on a stock is equal to _________.

A. the capital gain yield over the period plus the inflation rate

B. the capital gain yield over the period plus the dividend yield

C. the current yield plus the dividend yield

D. the dividend yield plus the risk premium

11. Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

A. Dollar-weighted return

B. Geometric average return

C. Arithmetic average return

D. Mean holding-period return

12. Published data on past returns earned by mutual funds are required to be ______.

A. dollar-weighted returns

B. geometric returns

C. excess returns

D. index returns

13. The arithmetic average of -11%, 15%, and 20% is ________.

A. 15.67%

B. 8%

C. 11.22%

D. 6.45%

14. The geometric average of -12%, 20%, and 25% is _________.

A. 8.42%

B. 11%

C. 9.7%

D. 18.88%

15. The dollar-weighted return is the _________.

A. difference between cash inflows and cash outflows

B. arithmetic average return

C. geometric average return

D. internal rate of return

16. An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______.

A. 41.68%

B. 11.32%

C. 3.64%

D. 13%

17. Annual percentage rates can be converted to effective annual rates by means of the following formula:

A. [1 + (APR/n)]n – 1

B. (APR)(n)

C. (APR/n)

D. (periodic rate)(n)

18. Suppose you pay \$9,700 for a \$10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment?

A. 3.01%

B. 3.09%

C. 12.42%

D. 16.71%

19. Suppose you pay \$9,800 for a \$10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment?

A. 2.04%

B. 12 %

C. 12.24%

D. 12.89%

20. Suppose you pay \$9,400 for a \$10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

A. 6.38%

B. 12.77%

C. 13.17%

D. 14.25%

21. You have an APR of 7.5% with continuous compounding. The EAR is _____.

A. 7.5%

B. 7.65%

C. 7.79 %

D. 8.25%

22. You have an EAR of 9%. The equivalent APR with continuous compounding is _____.

A. 8.47%

B. 8.62%

C. 8.88%

D. 9.42%

23. The market risk premium is defined as __________.

A. the difference between the return on an index fund and the return on Treasury bills

B. the difference between the return on a small-firm mutual fund and the return on the Standard & Poor’s 500 Index

C. the difference between the return on the risky asset with the lowest returns and the return on Treasury bills

D. the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

24. The excess return is the _________.

A. rate of return that can be earned with certainty

B. rate of return in excess of the Treasury-bill rate

D. index return

25. The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

A. risky assets; Treasury bills

B. Treasury bills; risky assets

C. excess returns; risky assets

D. index assets; bonds

26. The reward-to-volatility ratio is given by _________.

A. the slope of the capital allocation line

B. the second derivative of the capital allocation line

C. the point at which the second derivative of the investor’s indifference curve reaches zero

D. the portfolio’s excess return

27. Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?

A. 12.8%

B. 11%

C. 8.9%

D. 9.2%

28. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

A. 5.14%

B. 7.59%

C. 9.29%

D. 8.43%

29. During the 1926-2010 period the geometric mean return on small-firm stocks was ______.

A. 5.31%

B. 5.56%

C. 9.34%

D. 11.80%

30. During the 1926-2010 period the geometric mean return on Treasury bonds was _________.

A. 5.12%

B. 5.56%

C. 9.34%

D. 11.43%

31. During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes?

A. Small U.S. stocks

B. Large U.S. stocks

C. Long-term U.S. Treasury bonds

D. Bond world portfolio return in U.S. dollars

32. During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset classes?

A. Small U.S. stocks

B. Large U.S. stocks

C. Long-term U.S. Treasury bonds

D. Equity world portfolio in U.S. dollars

33. During the 1926-2010 period which one of the following asset classes provided the lowest real return?

A. Small U.S. stocks

B. Large U.S. stocks

C. Long-term U.S. Treasury bonds

D. Equity world portfolio in U.S. dollars

34. Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

A. is normally risk neutral

B. requires a risk premium to take on the risk

C. knows he or she will not lose money

D. knows the outcomes at the beginning of the holding period

35. Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms.

A. the same

B. lower

C. higher

D. none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

36. Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________.

A. small firms are better run than large firms

B. government subsidies available to small firms produce effects that are discernible in stock market statistics

C. small firms are riskier than large firms

D. small firms are not being accurately represented in the data

37. In calculating the variance of a portfolio’s returns, squaring the deviations from the mean results in:

I. Preventing the sum of the deviations from always equaling zero
II. Exaggerating the effects of large positive and negative deviations
III. A number for which the unit is percentage of returns

A. I only

B. I and II only

C. I and III only

D. I, II, and III

38. If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

A. 5.48%

B. 8.74%

C. 9%

D. 12%

39. If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with?

A. 3%

B. 8%

C. 11%

D. 11.24%

40. One method of forecasting the risk premium is to use the _______.

A. coefficient of variation of analysts’ earnings forecasts

B. variations in the risk-free rate over time

C. average historical excess returns for the asset under consideration

D. average abnormal return on the index portfolio

41. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio’s expected return is at least ______.

A. 8.67%

B. 9.84%

C. 21.28%

D. 14.68%

42. In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________.

A. capital allocation line

B. indifference curve

C. investor’s utility line

D. security market line

43. Most studies indicate that investors’ risk aversion is in the range _____.

A. 1-3

B. 1.5-4

C. 3-5.2

D. 4-6

44. Two assets have the following expected returns and standard deviations when the risk-free rate is 5%:

An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis.

A. only asset A is acceptable

B. only asset B is acceptable

C. neither asset A nor asset B is acceptable

D. both asset A and asset B are acceptable

45. Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____.

A. Stocks

B. Bonds

C. Money market funds

D. Treasury bills

46. The formula is used to calculate the _____________.

A. Sharpe ratio

B. Treynor measure

C. Coefficient of variation

D. Real rate of return

47. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____.

A. .22

B. .60

C. .42

D. .25

48. Consider a Treasury bill with a rate of return of 5% and the following risky securities:

Security A: E(r) = .15; variance = .0400
Security B: E(r) = .10; variance = .0225
Security C: E(r) = .12; variance = .1000
Security D: E(r) = .13; variance = .0625

The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________.

A. security A

B. security B

C. security C

D. security D

49. You purchased a share of stock for \$29. One year later you received \$2.25 as dividend and sold the share for \$28. Your holding-period return was _________.

A. -3.57%

B. -3.45%

C. 4.31%

D. 8.03%

50. Security A has a higher standard deviation of returns than security B. We would expect that:

I. Security A would have a higher risk premium than security B.
II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B.
III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

51. The holding-period return on a stock was 25%. Its ending price was \$18, and its beginning price was \$16. Its cash dividend must have been _________.

A. \$.25

B. \$1

C. \$2

D. \$4

52. An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio’s expected rate of return and standard deviation are __________ and __________ respectively.

A. 10%; 6.7%

B. 12%; 22.4%

C. 12%; 15.7%

D. 10%; 35%

53. The holding-period return on a stock was 32%. Its beginning price was \$25, and its cash dividend was \$1.50. Its ending price must have been _________.

A. \$28.50

B. \$33.20

C. \$31.50

D. \$29.75

54. Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________.

A. 1%

B. 3%

C. 6%

D. 9%

55. Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest \$50,000 in the risky portfolio, your expected profit would be _________.

A. \$3,000

B. \$7,000

C. \$7,500

D. \$10,000

56. You invest \$10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?

A. \$6,000

B. \$4,000

C. \$7,000

D. \$3,000

57. You invest \$1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.

A. 100%

B. 90%

C. 45%

D. 10%

58. You invest \$1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of \$1,100 could be formed if you _________.

A. place 40% of your money in the risky portfolio and the rest in the risk-free asset

B. place 55% of your money in the risky portfolio and the rest in the risk-free asset

C. place 60% of your money in the risky portfolio and the rest in the risk-free asset

D. place 75% of your money in the risky portfolio and the rest in the risk-free asset

59. You invest \$1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.

A. 1.040

B. .80

C. .50

D. .25

60. You have \$500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________.

A. invest \$125,000 in the risk-free asset

B. invest \$375,000 in the risk-free asset

C. borrow \$125,000

D. borrow \$375,000

61. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor’s borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________.

A. 6%

B. 8.75 %

C. 10%

D. 16.25%

62. You are considering investing \$1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in Treasury bills.

A. 19%

B. 25%

C. 36%

D. 50%

63. You are considering investing \$1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively.

A. 0%; 60%; 40%

B. 25%; 45%; 30%

C. 40%; 24%; 16%

D. 50%; 30%; 20%

64. You are considering investing \$1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________.

A. \$300; \$450

B. \$150; \$100

C. \$100; \$150

D. \$450; \$300

65. You are considering investing \$1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.

A. \$162; \$595; \$243

B. \$243; \$162; \$595

C. \$595; \$162; \$243

D. \$595; \$243; \$162

66. You have the following rates of return for a risky portfolio for several recent years:

If you invested \$1,000 at the beginning of 2008, your investment at the end of 2011 would be worth ___________.

A. \$2,176.60

B. \$1,785.56

C. \$1,645.53

D. \$1,247.87

67. You have the following rates of return for a risky portfolio for several recent years:

The annualized (geometric) average return on this investment is _____.

A. 16.15%

B. 16.87%

C. 21.32%

D. 15.60%

68. A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____.

A. 68.26%

B. 95.44%

C. 99.74%

D. 100%

69. The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?

A. .8

B. .6

C. 9

D. 1

70. From 1926 to 2010 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks.

A. lower; higher

B. lower; lower

C. higher; lower

D. higher; higher

71. The price of a stock is \$55 at the beginning of the year and \$50 at the end of the year. If the stock paid a \$3 dividend and inflation was 3%, what is the real holding-period return for the year?

A. -3.64%

B. -6.36%

C. -6.44%

D. -11.74%

72. The price of a stock is \$38 at the beginning of the year and \$41 at the end of the year. If the stock paid a \$2.50 dividend, what is the holding-period return for the year?

A. 6.58%

B. 8.86%

C. 14.47%

D. 18.66%

73. You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct?

I. Your nominal return on the T-bills is riskless.
II. Your real return on the T-bills is riskless.
III. Your nominal Sharpe ratio is zero.

A. I only

B. I and III only

C. II only

D. I, II, and III

74. Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

A. Money market fund

B. U.S. T-bill

C. Short-term corporate bonds

D. U.S. T-bill whose return was indexed to inflation

75. What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%?

A. 3.72%

B. 4.23%

C. 4.74%

D. 4.90%

76. What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%?

A. 8%

B. 8.33 %

C. 8.47%

D. 8.5 %

77. If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment?

A. 3.92%

B. 4%

C. 4.12%

D. 6%

78. According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return?

A. Long-term Treasury bonds

B. Corporate bonds

C. Common stocks

D. Preferred stocks

79. The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?

A. .50%

B. 5%

C. 6%

D. 6.5%

80. A loan for a new car costs the borrower .8% per month. What is the EAR?

A. .80%

B. 6.87%

C. 9.6%

D. 10.03%

81. The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______.

A. SML

B. CAPM

C. CML

D. total return line

82. Which of the following arguments supporting passive investment strategies is (are) correct?

I. Active trading strategies may not guarantee higher returns but guarantee higher costs.
II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information.
III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

83. You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends.

What is the geometric average return for the period?

A. 2.87%

B. .74%

C. 2.6%

D. 2.21%

84. You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends.

What is the dollar-weighted return over the entire time period?

A. 2.87%

B. .74%

C. 2.6%

D. 2.21%

Chapter 6: ___________________________________________________________________________
1. Risk that can be eliminated through diversification is called ______ risk.

A. unique

B. firm-specific

C. diversifiable

D. all of these options

2. The _______ decision should take precedence over the _____ decision.

A. asset allocation; stock selection

B. bond selection; mutual fund selection

C. stock selection; asset allocation

D. stock selection; mutual fund selection

3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.

A. they had to pay huge fines for obstruction of justice

B. their 401k accounts were held outside the company

C. their 401k accounts were not well diversified

D. none of these options

4. Based on the outcomes in the following table, choose which of the statements below is (are) correct?

I. The covariance of security A and security B is zero.
II. The correlation coefficient between securities A and C is negative.
III. The correlation coefficient between securities B and C is positive.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

A. asset A

B. asset B

C. no risky asset

D. The answer cannot be determined from the data given.

6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

A. up; right

B. up; left

C. down; right

D. down; left

7. An investor’s degree of risk aversion will determine his or her ______.

A. optimal risky portfolio

B. risk-free rate

C. optimal mix of the risk-free asset and risky asset

D. capital allocation line

8. The ________ is equal to the square root of the systematic variance divided by the total variance.

A. covariance

B. correlation coefficient

C. standard deviation

D. reward-to-variability ratio

9. Which of the following statistics cannot be negative?

A. Covariance

B. Variance

C. E(r)

D. Correlation coefficient

10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?

A. .40

B. .50

C. .75

D. .80

11. The correlation coefficient between two assets equals _________.

A. their covariance divided by the product of their variances

B. the product of their variances divided by their covariance

C. the sum of their expected returns divided by their covariance

D. their covariance divided by the product of their standard deviations

12. Diversification is most effective when security returns are _________.

A. high

B. negatively correlated

C. positively correlated

D. uncorrelated

13. The expected rate of return of a portfolio of risky securities is _________.

A. the sum of the securities’ covariances

B. the sum of the securities’ variances

C. the weighted sum of the securities’ expected returns

D. the weighted sum of the securities’ variances

14. Beta is a measure of security responsiveness to _________.

A. firm-specific risk

B. diversifiable risk

C. market risk

D. unique risk

15. The risk that can be diversified away is __________.

A. beta

B. firm-specific risk

C. market risk

D. systematic risk

16. Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

A. 2

B. 6

C. 8

D. 20

17. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.

A. equal to the sum of the securities’ standard deviations

B. equal to -1

C. equal to 0

D. greater than 0

18. Market risk is also called __________ and _________.

A. systematic risk; diversifiable risk

B. systematic risk; nondiversifiable risk

C. unique risk; nondiversifiable risk

D. unique risk; diversifiable risk

19. Firm-specific risk is also called __________ and __________.

A. systematic risk; diversifiable risk

B. systematic risk; nondiversifiable risk

C. unique risk; nondiversifiable risk

D. unique risk; diversifiable risk

20. Which one of the following stock return statistics fluctuates the most over time?

A. Covariance of returns

B. Variance of returns

C. Average return

D. Correlation coefficient

21. Harry Markowitz is best known for his Nobel Prize-winning work on _____________.

A. strategies for active securities trading

B. techniques used to identify efficient portfolios of risky assets

C. techniques used to measure the systematic risk of securities

D. techniques used in valuing securities options

22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

A. the returns on the stock and bond portfolios tend to move inversely

B. the returns on the stock and bond portfolios tend to vary independently of each other

C. the returns on the stock and bond portfolios tend to move together

D. the covariance of the stock and bond portfolios will be positive

23. You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.

A. more than 18% but less than 24%

B. equal to 18%

C. more than 12% but less than 18%

D. equal to 12%

24. On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.

A. left and above

B. left and below

C. right and above

D. right and below

25. The term complete portfolio refers to a portfolio consisting of _________________.

A. the risk-free asset combined with at least one risky asset

B. the market portfolio combined with the minimum-variance portfolio

C. securities from domestic markets combined with securities from foreign markets

D. common stocks combined with bonds

26. Rational risk-averse investors will always prefer portfolios _____________.

A. located on the efficient frontier to those located on the capital market line

B. located on the capital market line to those located on the efficient frontier

C. at or near the minimum-variance point on the efficient frontier

D. that are risk-free to all other asset choices

27. The optimal risky portfolio can be identified by finding:

I. The minimum-variance point on the efficient frontier
II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier
III. The tangency point of the capital market line and the efficient frontier
IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

A. I and II only

B. II and III only

C. III and IV only

D. I and IV only

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

A. lowest; steepest

B. highest; flattest

C. highest; steepest

D. lowest; flattest

29. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.

A. .583

B. .225

C. .327

D. .128

30. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.

A. .12

B. .36

C. .60

D. .77

31. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

A. 23%

B. 19.76%

C. 18.45%

D. 17.67%

32. The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.

A. -.0447

B. -.0020

C. .0020

D. .0447

33. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________.

A. 10%

B. 20%

C. 40%

D. 60%

34. 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 proportion of the optimal risky portfolio that should be invested in stock A is _________.

A. 0%

B. 40%

C. 60%

D. 100%

35. 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 expected return on the optimal risky portfolio is _________.

A. 14%

B. 15.6%

C. 16.4%

D. 18%

36. 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 _________.

A. 0%

B. 5%

C. 7%

D. 20%

37. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

A. 29%

B. 44%

C. 56%

D. 71%

38. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.)

A. 14%

B. 16%

C. 18%

D. 19%

39. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________.

A. 25.5%

B. 22.3%

C. 21.4%

D. 20.7%

40. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________.

A. 45%

B. 67%

C. 85%

D. 92%

41. 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 expected return on the minimum-variance portfolio is approximately _________.

A. 10%

B. 13.6%

C. 15%

D. 19.41%

42. 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 standard deviation of return on the minimum-variance portfolio is _________.

A. 0%

B. 6%

C. 12%

D. 17%

43. A measure of the riskiness of an asset held in isolation is ____________.

A. beta

B. standard deviation

C. covariance

D. alpha

44. Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool’s return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool’s products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool’s actual excess return?

A. 7%

B. 8.5%

C. 8.8%

D. 9.25%

45. The part of a stock’s return that is systematic is a function of which of the following variables?

I. Volatility in excess returns of the stock market
II. The sensitivity of the stock’s returns to changes in the stock market
III. The variance in the stock’s returns that is unrelated to the overall stock market

A. I only

B. I and II only

C. II and III only

D. I, II, and III

46. 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.

A. 20% more

B. slightly more

C. 20% less

D. slightly less

47. Which risk can be partially or fully diversified away as additional securities are added to a portfolio?

I. Total risk
II. Systematic risk
III. Firm-specific risk

A. I only

B. I and II only

C. I, II, and III

D. I and III

48. 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

49. You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________.

A. all fall on the line of best fit; positive slope

B. all fall on the line of best fit; negative slope

C. are widely scattered around the line; positive slope

D. are widely scattered around the line; negative slope

50. The term excess return refers to ______________.

A. returns earned illegally by means of insider trading

B. the difference between the rate of return earned and the risk-free rate

C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk

D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

51. You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________.

A. covariance between ACE and the market has fallen

B. correlation coefficient between ACE and the market has fallen

C. correlation coefficient between ACE and the market has risen

D. unsystematic risk of ACE has risen

52. 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?

A. 1

B. .75

C. .60

D. .55

53. The values of beta coefficients of securities are __________.

A. always positive

B. always negative

C. always between positive 1 and negative 1

D. usually positive but are not restricted in any particular way

54. A security’s beta coefficient will be negative if ____________.

A. its returns are negatively correlated with market-index returns

B. its returns are positively correlated with market-index returns

C. its stock price has historically been very stable

D. market demand for the firm’s shares is very low

55. The market value weighted-average beta of firms included in the market index will always be _____________.

A. 0

B. between 0 and 1

C. 1

D. none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

56. Diversification can reduce or eliminate __________ risk.

A. all

B. systematic

C. nonsystematic

D. only an insignificant

57. To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

A. 1

B. .5

C. 0

D. -1

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

A. 1

B. less than 1

C. between 0 and 1

D. less than or equal to 0

59. If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.

A. stock’s standard deviation

B. variance of the market

C. stock’s beta

D. covariance with the market index

60. Which of the following provides the best example of a systematic-risk event?

A. A strike by union workers hurts a firm’s quarterly earnings.

B. Mad Cow disease in Montana hurts local ranchers and buyers of beef.

C. The Federal Reserve increases interest rates 50 basis points.

D. A senior executive at a firm embezzles \$10 million and escapes to South America.

61. Which of the following statements is (are) true regarding time diversification?

I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation.
II. For a longer time horizon, uncertainty compounds over a greater number of years.
III. Time diversification does not reduce risk.

A. I only

B. II only

C. II and III only

D. I, II, and III

62. You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.

A. 1.8

B. 2.48

C. 3.12

D. 5.49

63.

The beta of this stock is ____.

A. .12

B. .35

C. 1.32

D. 4.05

64.

This stock has greater systematic risk than a stock with a beta of ___.

A. .50

B. 1.5

C. 2

D. 3

65.

The characteristic line for this stock is Rstock = ___ + ___ Rmarket.

A. .35; .12

B. 4.05; 1.32

C. 15.44; .97

D. .26; 1.36

66.

_______________ percent of the variance is explained by this regression.

A. 12

B. 35

C. 4.05

D. 80

67.

The stock is ______ riskier than the typical stock.

A. 32%

B. 15.44%

C. 12%

D. 38%

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

A. increase the systematic risk of the portfolio

B. increase the unsystematic risk of the portfolio

C. increase the return of the portfolio

D. decrease the variation in returns the investor faces in any one year

69. If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.

A. calculate two covariances and one trivariance

B. calculate only two covariances

C. calculate three covariances

D. average the variances of the individual stocks

70. Which of the following correlation coefficients will produce the least diversification benefit?

A. -.6

B. -.3

C. 0

D. .8

71. Which of the following correlation coefficients will produce the most diversification benefits?

A. -.6

B. -.9

C. 0

D. .4

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

A. -1

B. 0

C. 1

D. .5

73. Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

A. Market risk

B. Nondiversifiable risk

C. Systematic risk

D. Unique risk

74. Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?

A. Market risk

B. Unique risk

C. Unsystematic risk

D. None of these options (With a correlation of 1, no risk will be reduced.)

75. A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.

A. firm-specific risk

B. systematic risk

C. unique risk

D. none of the options

76. As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that:

I. The average risk per year may be smaller over longer investment horizons.
II. The overall risk of your investment will compound over time.
III. Your overall risk on the investment will fall.

A. I only

B. I and II only

C. III only

D. I, II, and III

77. You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security’s:

I. Expected return
II. Standard deviation

A. I only

B. I and II only

C. I and III only

D. I, II, and III

78. 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?

A. σ2rp < (W12σ12 + W22σ22) B. σ2rp = (W12σ12 + W22σ22) C. σ2rp = (W12σ12 – W22σ22) D. σ2rp > (W12σ12 + W22σ22)

79. What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.

A. 9.7%

B. 12.2%

C. 14%

D. 15.6%

80. 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.

A. 0%

B. 10.8%

C. 18%

D. 24%

81. The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?

A. 0

B. .45

C. .74

D. 1.35

82. A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment?

A. 25%

B. 50%

C. 62%

D. 73%

83. A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project?

A. 0%

B. 25%

C. 50%

D. 75%

84. 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?

A. Stock A

B. Stock B

C. There is no difference between A or B.

D. The answer cannot be determined from the information given.

85. The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.

Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?

A. Stock A is riskier.

B. Stock B is riskier.

C. Both stocks are equally risky.

D. The answer cannot be determined from the information given.