Question 1

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. Therefore, choice D is the correct answer.

Question 2

A financial manager's goal for the firm is to create a portfolio that maximizes return for a given level of risk.

Accepted Answer

The primary goal of a financial manager is to maximize shareholder wealth, typically represented by maximizing the stock price, rather than specifically creating a portfolio that maximizes return for a given level of risk, which is more directly related to the role of an investment manager or portfolio manager.

Question 3

An efficient portfolio is defined as ________.
A)grouping of assets with same level of risk
B)collection of assets with the aim of maximizing the return for a given risk level
C)an investment in a single asset
D)grouping of assets with the highest possible correlation

Accepted Answer

An efficient portfolio is a collection of assets that aims to maximize the return for a given level of risk. It is achieved through diversification, choosing a combination of assets with low or negative correlations, to reduce the overall risk of the portfolio while maximizing returns. Option A is incorrect because assets with the same level of risk may not necessarily lead to an efficient portfolio. Option C is also incorrect because investing in a single asset does not achieve diversification and may lead to a high level of risk. Option D is incorrect because a portfolio with the highest possible correlation may increase the overall risk of the portfolio.

Question 4

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 as per the formula for calculating the standard deviation of a portfolio which includes the weights of individual securities and their respective standard deviations and correlations.

Question 5

Table 8.1 
-The correlation of returns between Asset A and Asset B can be characterized as ________.(See Table 8.1)
A)perfectly positively correlated
B)perfectly negatively correlated
C)uncorrelated
D)partially correlated

Accepted Answer

The correlation coefficient between Asset A and Asset B is -1 in Table 8.1, indicating a perfect negative 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)11.78%

Accepted Answer

The answer of An investment advisor has recommended a $50,000...

Question 7

You are trying to decide which mutual fund to invest in.There are many choices,so you begin by analyzing just two funds,the Emerging Markets Fund (EMF)and the Small Stock Fund (SSF).Both funds have an expected return of 10%.EMF has a standard deviation or 20%,while SSF has a standard deviation of 22%.From this information can you conclude that either EMF or SSF is an efficient portfolio? Can you say that either portfolio is inefficient (i.e.,does not maximize return for a given risk level?

Accepted Answer

The answer of You are trying to decide which mutual...

Question 8

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

Accepted Answer

An efficient portfolio is one that achieves the highest possible return for a given level of risk or the lowest possible risk for a given level of return. It is achieved by finding the combination of assets that maximizes the expected return for a given level of risk or minimizes the risk for a given level of expected return.

Question 9

Table 8.1 
-The portfolio with a standard deviation of zero ________.(See Table 8.1)
A)is comprised of Assets A and B
B)is comprised of Assets A and C
C)is not possible
D)cannot be determined

Accepted Answer

According to Table 8.1, the only combination of assets with a standard deviation of zero is Assets A and B.

Question 10

Table 8.1 
-If you were to create a portfolio designed to reduce risk by investing equal proportions in each of two different assets,which portfolio would you recommend? (See Table 8.1)
A)Assets A and B
B)Assets A and C
C)none of the available combinations
D)cannot be determined

Accepted Answer

Assets A and B have the lowest correlation coefficient of -0.3, indicating a negative relationship between the returns of the two assets. Investing equal proportions in each asset can help reduce overall portfolio risk through diversification.

Question 11

The College Copy Shop is in the process of purchasing a high-tech copier.In its search,it has 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 the...

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 can result in a portfolio with a lower level of risk due to the diversification effect. However, it does not change the expected return of the portfolio because the assets have the same expected return. Therefore, the correct answer is C - the same level of expected return and a lower level of risk.

Question 13

A(n)________ portfolio maximizes return for a given level of risk.
A)efficient
B)risk-free
C)risk-neutral
D)risk-indifferent

Accepted Answer

An efficient portfolio is one that provides the maximum possible return for a given level of risk. It is considered efficient because there is no way to achieve a higher return without taking on more risk, or to reduce risk without sacrificing some return. A risk-free portfolio would not have any risk and therefore would not be maximizing return for a given level of risk. Risk-neutral and risk-indifferent portfolios are not commonly used terms in finance.

Question 14

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 seems to be a better investment?

Accepted Answer

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

Question 15

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

Accepted Answer

A correlation coefficient of +1 indicates that the two assets move in the same direction perfectly, but it does not inherently determine their risk level. Risk is assessed by other measures such as volatility, not correlation.

Question 16

________ is a statistical measure of the relationship between any two series of numbers.
A)Coefficient of variation
B)Standard deviation
C)Correlation
D)Probability

Accepted Answer

Correlation is the statistical measure of the relationship between any two series of numbers. It ranges from -1 to +1, with -1 indicating a perfect negative correlation (as one variable increases, the other decreases), +1 indicating a perfect positive correlation (as one variable increases, the other also increases), and 0 indicating no correlation between the two variables. The coefficient of variation and standard deviation are measures of variability, while probability is a measure of the likelihood of an event occurring.

Question 17

An efficient portfolio is one that ________.
A)guarantees a predetermined rate of return
B)maximizes return for a given level of risk
C)consists of a single asset,which gives maximum return
D)maximizes return at all risk levels

Accepted Answer

An efficient portfolio is one that maximizes return for a given level of risk. It helps investors achieve the highest possible return for a specific level of risk they are willing to take. Therefore, option B is the correct answer as it defines an efficient portfolio accurately. Option A is incorrect because an efficient portfolio does not necessarily guarantee a predetermined rate of return. Option C is incorrect because a single asset cannot provide maximum return and diversification is necessary in an efficient portfolio. Option D is incorrect because an efficient portfolio maximizes return for a given level of risk, not at all risk levels.

Question 18

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

Accepted Answer

A correlation coefficient of -1 indicates perfect negative correlation, meaning the assets move in exactly opposite directions, but it does not imply that the assets are risk-free or low-risk.

Question 19

Given the returns of two stocks J and K in the table below over the next 4 years.Find the expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock K over the next 4 years: 
A)10.7% and 1.34%
B)10.6% and 1.79%
C)10.6% and 1.16%
D)14.3% and 2.02%

Accepted Answer

The answer of Given the returns of two stocks J...

Question 20

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 will affect the overall risk and return of the portfolio of assets, as the risk of any single proposed asset investment is not independent of other assets already in the portfolio. It is important to consider the correlation between the new investment and existing investments to ensure that the portfolio remains diversified and meets the investor's objectives.

Quiz 8: Risk and Return

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 financial manager's goal for the firm is to create a portfolio that maximizes return for a given level of risk.

An efficient portfolio is defined as ________.

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.

Table 8.1 -The correlation of returns between Asset A and Asset B can be characterized as ________.(See Table 8.1)

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

Table 8.1 -The portfolio with a standard deviation of zero ________.(See Table 8.1)

Table 8.1 -If you were to create a portfolio designed to reduce risk by investing equal proportions in each of two different assets,which portfolio would you recommend? (See Table 8.1)

Combining negatively correlated assets having the same expected return results in a portfolio with level of expected return and level of risk.

A(n) ________ portfolio maximizes return for a given level of risk.

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 seems to be a better investment?

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

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

An efficient portfolio is one that ________.

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

Given the returns of two stocks J and K in the table below over the next 4 years.Find the expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock K over the next 4 years:

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.