Question 1

Consider the following probability distribution for stocks A and B:  The variances of stocks A and B are _____ and _____, respectively.

Accepted Answer

The answer of Consider the following probability distribution for stocks...

Question 2

The measure of risk in a Markowitz efficient frontier is

Accepted Answer

The measure of risk in a Markowitz efficient frontier is the standard deviation of returns, which represents the variability of returns around the expected return. This is the most commonly used measure of risk in portfolio theory, and it is used to select portfolios that achieve a desired level of expected return while minimizing risk.

Question 3

Which statement about portfolio diversification is correct?

Accepted Answer

As more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate, as the benefits of diversification become smaller with each additional security added. However, proper diversification cannot eliminate systematic risk (risk inherent in the market or economy as a whole) but can reduce unsystematic risk (risk specific to individual securities or sectors). Also, diversification does not necessarily reduce the portfolio's expected return, but rather it can improve the risk-return tradeoff by lowering the portfolio's overall risk level. Finally, there is no specific number of securities required for meaningful risk reduction through diversification, as the degree of risk reduction will depend on the specific characteristics of the securities and their correlations with each other.

Question 4

The unsystematic risk of a specific security

Accepted Answer

Unsystematic risk is also known as company-specific risk, which arises from factors that are unique to a particular company, such as its management, operations, legal issues, and competition. It can be diversified away by holding a well-diversified portfolio of different securities, as opposed to systemic risk, which affects the broader market and cannot be eliminated by diversification. The level of unsystematic risk of a specific security does not necessarily depend on market conditions or volatility.

Question 5

Consider the following probability distribution for stocks A and B:  The standard deviations of stocks A and B are _____ and _____, respectively.

Accepted Answer

The answer of Consider the following probability distribution for stocks...

Question 6

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

Accepted Answer

The answer of Which one of the following portfolios cannot...

Question 7

Portfolio theory as described by Markowitz is most concerned with

Accepted Answer

Portfolio theory, as described by Markowitz, is most concerned with the effect of diversification on portfolio risk. It aims to optimize the risk-return tradeoff by selecting a combination of assets that has the lowest possible risk for a given level of expected return. This is achieved through diversification, which reduces the unsystematic risk of a portfolio. Markowitz's theory does not aim at eliminating systematic risk or identifying unsystematic risk, though active portfolio management can be used to enhance returns within the framework of portfolio theory.

Question 8

For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?

Accepted Answer

A correlation coefficient of -1.00 between two stocks in a portfolio is preferred for diversification purposes because it means the stocks move in exactly opposite directions, reducing the portfolio's overall risk.

Question 9

Consider the following probability distribution for stocks A and B:  If you invest 40% of your money in A and 60% in B, what would be your portfolio's expected rate of return and standard deviation?

Accepted Answer

The answer of Consider the following probability distribution for stocks...

Question 10

Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Accepted Answer

The answer of Given an optimal risky portfolio with expected...

Question 11

Which of the following is not a source of systematic risk?

Accepted Answer

Personnel changes are not considered a source of systematic risk as they are specific to individual companies and do not affect the overall market. The other options listed (the business cycle, interest rates, and inflation rate) are all macroeconomic factors that can impact the entire market and are considered sources of systematic risk.

Question 12

Consider the following probability distribution for stocks A and B:  The expected rates of return of stocks A and B are _____ and _____, respectively.

Accepted Answer

The expected rate of return of stock A can be calculated as:
(0.2 x 0.07) + (0.3 x 0.10) + (0.5 x 0.15) = 0.013 + 0.03 + 0.075 = 0.118 or 11.8%
And the expected rate of return of stock B can be calculated as:
(0.2 x 0.13) + (0.3 x 0.09) + (0.5 x 0.05) = 0.026 + 0.027 + 0.025 = 0.078 or 7.8%
Therefore, the closest answer choice is C, which states the expected rates of return for stocks A and B as 13.2% and 7.7%, respectively.

Question 13

The individual investor's optimal portfolio is designated by

Accepted Answer

The optimal portfolio for an individual investor is where their highest indifference curve is tangent to the capital allocation line, indicating the best risk-return trade-off according to their preferences.

Question 14

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

Accepted Answer

The answer of Which one of the following portfolios cannot...

Question 15

Consider the following probability distribution for stocks A and B:  The coefficient of correlation between A and B is

Accepted Answer

The answer of Consider the following probability distribution for stocks...

Question 16

Consider the following probability distribution for stocks A and B:  The expected rate of return and standard deviation of the global minimum variance portfolio, G, are __________ and __________, respectively.

Accepted Answer

The answer of Consider the following probability distribution for stocks...

Question 17

In a two-security minimum variance portfolio where the correlation between securities is greater than -1.0,

Accepted Answer

In a two-security minimum variance portfolio, the security with the higher standard deviation will be weighted less heavily. This is because the portfolio seeks to minimize the overall variance or risk, and the security with the higher standard deviation contributes more to the portfolio's variance. Therefore, it is weighted less to reduce the overall risk of the portfolio.

Question 18

Security X has expected return of 12% and standard deviation of 18%.Security Y has expected return of 15% and standard deviation of 26%.If the two securities have a correlation coefficient of 0.7, what is their covariance?

Accepted Answer

The formula for covariance is:
Cov(X,Y) = Corr(X,Y) x StdDev(X) x StdDev(Y)
Plugging in the values:
Cov(X,Y) = 0.7 x 0.18 x 0.26 = 0.033
Therefore, the answer is D.

Question 19

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

Accepted Answer

The global minimum variance portfolio becomes riskless when the correlation coefficient between the two securities is -1.0. This is because a perfect negative correlation (-1.0) between the securities allows for the complete elimination of risk through diversification.

Question 20

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must

Accepted Answer

To form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line, the investor needs to take on more risk. This can be done by borrowing some money at the risk-free rate, investing in the optimal risky portfolio for maximum returns, and also investing in additional risky securities to increase the overall risk and potential returns of the portfolio.

Quiz 7: Optimal Risky Portfolios

Consider the following probability distribution for stocks A and B: The variances of stocks A and B are _ and _, respectively.

The measure of risk in a Markowitz efficient frontier is

Which statement about portfolio diversification is correct?

The unsystematic risk of a specific security

Consider the following probability distribution for stocks A and B: The standard deviations of stocks A and B are _ and _, respectively.

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

Portfolio theory as described by Markowitz is most concerned with

For a two-stock portfolio, what would be the preferred correlation coefficient between the two stocks?

Consider the following probability distribution for stocks A and B: If you invest 40% of your money in A and 60% in B, what would be your portfolio's expected rate of return and standard deviation?

Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

Which of the following is not a source of systematic risk?

Consider the following probability distribution for stocks A and B: The expected rates of return of stocks A and B are _ and _, respectively.

The individual investor's optimal portfolio is designated by

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

Consider the following probability distribution for stocks A and B: The coefficient of correlation between A and B is

Consider the following probability distribution for stocks A and B: The expected rate of return and standard deviation of the global minimum variance portfolio, G, are and , respectively.

In a two-security minimum variance portfolio where the correlation between securities is greater than -1.0,

Security X has expected return of 12% and standard deviation of 18%.Security Y has expected return of 15% and standard deviation of 26%.If the two securities have a correlation coefficient of 0.7, what is their covariance?

The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must