Question 1

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

Accepted Answer

This statement is true. The formula for the standard deviation of a portfolio takes into account these three factors, and the correlation between the returns of the securities can have a significant impact on the overall risk of the portfolio.

Question 2

A collection of assets is called a(n)
A) grouping.
B) portfolio.
C) investment.
D) diversity.

Accepted Answer

A collection of assets that an investor holds is referred to as a portfolio. This can include a range of different types of investments, such as stocks, bonds, and mutual funds. A well-diversified portfolio can help to minimize risk and maximize returns.

Question 3

The goal of an efficient portfolio is to
A) maximize risk for a given level of return.
B) maximize risk in order to maximize profit.
C) minimize profit in order to minimize risk.
D) minimize risk for a given level of return.

Accepted Answer

The goal of an efficient portfolio is to minimize risk for a given level of return. This means that an investor can achieve the highest possible return for a given level of risk or the lowest possible risk for a given level of return by choosing an efficient portfolio. The efficient portfolio is a combination of assets that offer the best risk and return profile.

Question 4

New investments must be considered in light of their impact on the risk and return of the portfolio of assets because the risk of any single proposed asset investment is not independent of other assets.

Accepted Answer

New investments can impact the overall risk and return of a portfolio, as the risk of any one investment is not independent of the others in the portfolio. Therefore, it is important to consider the potential impact of a new investment on the portfolio as a whole.

Question 5

Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite directions and have a correlation coefficient of ________.
A) negatively; -1; positively; +1
B) negatively; +1; positively; -1
C) positively; -1; negatively; +1
D) positively; +1; negatively; -1

Accepted Answer

Perfectly positively correlated series move exactly together and have a correlation coefficient of +1, while perfectly negatively correlated series move exactly in opposite directions and have a correlation coefficient of -1. Option D matches the correct description of both types of correlation.

Question 6

An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is
A) 12.67%.
B) 12.00%.
C) 10.00%.
D) unable to be determined from the information provided.

Accepted Answer

To find the expected annual return of the portfolio, we need to take a weighted average of the expected returns of each asset, where the weights are the proportions of the portfolio invested in each asset:

Expected return of portfolio = (0.50 x 0.12) + (0.20 x 0.18) + (0.30 x 0.08) 
= 0.06 + 0.036 + 0.024 
= 0.12 or 12%

Therefore, the expected annual return of the portfolio is 12%. The answer is B.

Question 7

Champion Breweries must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis.  For each asset, compute
(a) the expected rate of return.
(b) the standard deviation of the expected return.
(c) the coefficient of variation of the return.
(d) Which asset should Champion select?

Accepted Answer

The answer of Champion Breweries must choose between two asset...

Question 8

The ________ is a statistical measure of the relationship between series of numbers.
A) coefficient of variation
B) standard deviation
C) correlation
D) probability

Accepted Answer

The correlation coefficient is a statistical measure that assesses the degree of association between two or more variables. The coefficient ranges from -1 to 1, with 0 indicating no correlation, -1 indicating a negative correlation, and 1 indicating a positive correlation. The other answer choices are also measures used in statistics, but they do not specifically measure the relationship between series of numbers like correlation does.

Question 9

Assuming the following returns and corresponding probabilities for asset A, compute its standard deviation and coefficient of variation.

Accepted Answer

The answer of Assuming the following returns and corresponding probabilities...

Question 10

A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.
A) efficient
B) coefficient
C) continuous
D) risk-indifferent

Accepted Answer

An efficient portfolio is one that maximizes return for a given level of risk or minimizes risk for a given level of return. It is considered the best portfolio because it provides the highest expected return for a given level of risk or the lowest risk for a given level of expected return. Coefficient, continuous, and risk-indifferent portfolios are not relevant in this context.

Question 11

Given the following probability distribution for assets X and Y, compute the expected rate of return, variance, standard deviation, and coefficient of variation for the two assets. Which asset is a better investment?

Accepted Answer

The answer of Given the following probability distribution for assets...

Question 12

Combining negatively correlated assets having the same expected return results in a portfolio with ________ level of expected return and ________ level of risk.
A) a higher; a lower
B) the same; a higher
C) the same; a lower
D) a lower; a higher

Accepted Answer

Combining negatively correlated assets reduces overall portfolio risk while maintaining the same level of expected return. Therefore, the portfolio will have the same level of expected return and a lower level of risk compared to individual assets.

Question 13

Two assets whose returns move in the opposite directions and have a correlation coefficient of -1 are both either risk-free assets or low-risk assets.

Accepted Answer

Assets whose returns move in opposite directions and have a correlation coefficient of -1 are not necessarily risk-free or low-risk assets. They can be risky assets with different risk exposures, but whose returns move in opposite directions.

Question 14

The College Copy Shop is in process of purchasing a high-tech copier. In their search, they have gathered the following information about two possible copiers A and B.   (a) Compute expected rate of return for each copier.
(b) Compute variance and standard deviation of rate of return for each copier.
(c) Which copier should they purchase?

Accepted Answer

The answer of The College Copy Shop is in process...

Question 15

The financial manager's goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm.

Accepted Answer

The financial manager's primary goal is to maximize shareholder wealth, which involves balancing risk and return, not just maximizing return.

Question 16

An efficient portfolio is one that
A) maximizes risk for a given level of return.
B) maximizes return for a given level of risk.
C) minimizes return for a given level of risk.
D) maximizes return at all risk levels.

Accepted Answer

An efficient portfolio is one that maximizes return for a given level of risk. This means that it provides the highest return for a certain level of risk, or the lowest risk for a certain level of return. It is the optimal balance between risk and return, and is desirable for investors who want to achieve their investment goals while minimizing risk.

Question 17

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are each very risky assets.

Accepted Answer

A correlation coefficient of +1 indicates perfect positive correlation, meaning the assets move in the same direction, but it does not necessarily imply that each asset is very risky. Risk is determined by the volatility of each asset, not just their correlation.

Question 18

Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return? Explain the difference?

Accepted Answer

The answer of Nico bought 100 shares of Cisco Systems...

Question 19

An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return.

Accepted Answer

An efficient portfolio is designed to optimize the tradeoff between risk and return, either by maximizing return for a given level of risk or minimizing risk for a given level of return.

Question 20

The standard deviation of a portfolio is a function only of the standard deviations of the individual securities in the portfolio and the proportion of the portfolio invested in those securities.

Accepted Answer

The standard deviation of a portfolio also depends on the correlations between the returns of the individual securities, not just their individual standard deviations and proportions.

Quiz 8: Risk and Return

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

A collection of assets is called a(n)

The goal of an efficient portfolio is to

New investments must be considered in light of their impact on the risk and return of the portfolio of assets because the risk of any single proposed asset investment is not independent of other assets.

Perfectly correlated series move exactly together and have a correlation coefficient of , while perfectly correlated series move exactly in opposite directions and have a correlation coefficient of .

The ________ is a statistical measure of the relationship between series of numbers.