Deck 6: An Introduction to Portfolio Management

Question 1

The correlation coefficient and the covariance are measures of the extent to which two random variables move together.

Answer 1

True

Question 2

Markowitz assumed that, given an expected return, investors prefer to minimize risk.

Answer 2

True

Question 3

The expected return and standard deviation of a portfolio of risky assets is equal to the weighted average of the individual asset's expected returns and standard deviation.

Answer 3

False

Question 4

An investor is risk neutral if she chooses the asset with lower risk given a choice of several assets with equal returns.

Question 5

In a three-asset portfolio the standard deviation of the portfolio is one third of the square root of the sum of the individual standard deviations.

Question 6

Assuming that everyone agrees on the efficient frontier (given a set of costs), there would be consensus that the optimal portfolio on the frontier would be where the ratio of return per unit of risk was greatest.

Question 7

If the covariance of two stocks is positive, these stocks tend to move together over time.

Question 8

A measure that only considers deviations above the mean is semi-variance.

Question 9

Prior to the work of Markowitz in the late 1950s and early 1960s, portfolio managers did not have a well developed, quantitative means of measuring risk.

Question 10

When individuals evaluate their portfolios they should evaluate

A) All the Canadian and non-Canadian. stocks.
B) All marketable securities.
C) All marketable securities and other liquid assets.
D) All assets.
E) All assets and liabilities.

Question 11

As the number of risky assets in a portfolio increases, the total risk of the portfolio decreases.

Question 12

For a two-stock portfolio containing Stocks i and j, the correlation coefficient of returns (r??) is equal to the square root of the covariance (cov??).

Question 13

The combination of two assets that are completely negatively correlated provides maximum returns.

Question 14

Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio.

Question 15

Risk is defined as the uncertainty of future outcomes.

Question 16

Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.

Question 17

A good portfolio is a collection of individually good assets.

Question 18

The probability of an adverse outcome is a definition of

A) Statistics.
B) Variance.
C) Random.
D) Risk.
E) Semi-variance above the mean.

Question 19

A portfolio is efficient if no other asset or portfolios offer higher expected return with the same (or lower) risk or lower risk with the same (or higher) expected return.

Question 20

A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.

Question 21

Semi-variance, when applied to portfolio theory, is concerned with

A) The square root of deviations from the mean.
B) All deviations below the mean.
C) All deviations above the mean.
D) All deviations.
E) The summation of the squared deviations from the mean.

Question 22

In a two-stock portfolio, if the correlation coefficient between two stocks were to decrease over time everything else remaining constant the portfolio's risk would

A) Decrease.
B) Remain constant.
C) Increase.
D) Fluctuate positively and negatively.
E) Be a negative value.

Question 23

In a given a portfolio of stocks, what is the envelope curve containing the set of best possible combinations known as?

A) Efficient portfolio.
B) Utility curve.
C) Efficient frontier.
D) Last frontier.
E) Capital asset pricing model.

Question 24

You are given a two-asset portfolio with a fixed correlation coefficient. If the weights of the two assets are varied the expected portfolio return would be ____ and the expected portfolio standard deviation would be ____.

A) Nonlinear, elliptical
B) Nonlinear, circular
C) Linear, elliptical
D) Linear, circular
E) Circular, elliptical

Question 25

The most import criteria when adding new investments to a portfolio is the

A) Expected return of the new investment.
B) Standard deviation of the new investment.
C) Correlation of the new investment with the portfolio.
D) Choices a and
E) All of the above are equally important.

Question 26

Which of the following statements about the correlation coefficient is false?

A) The values range between -1 to +1.
B) A value of +1 implies that the returns for the two stocks move together in a completely linear manner.
C) A value of -1 implies that the returns move in a completely opposite direction.
D) A value of zero means that the returns are independent.
E) None of the above (that is, all statements are true)

Question 27

A positive covariance between two variables indicates that

A) the two variables move in different directions.
B) the two variables move in the same direction.
C) the two variables are low risk.
D) the two variables are high risk.
E) the two variables are risk free.

Question 28

The optimal portfolio is identified at the point of tangency between the efficient frontier and the

A) highest possible utility curve.
B) lowest possible utility curve.
C) middle range utility curve.
D) steepest utility curve.
E) flattest utility curve.

Question 29

The Markowitz model is based on several assumptions regarding investor behaviour. Which of the following is not such any assumption?

A) Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
B) Investors maximize one-period expected utility.
C) Investors estimate the risk of the portfolio on the basis of the variability of expected returns.
D) Investors base decisions solely on expected return and risk.
E) None of the above (that is, all are assumptions of the Markowitz model)

Question 30

As the correlation coefficient between two assets decreases, the shape of the efficient frontier

A) approaches a horizontal straight line.
B) bends out.
C) bends in.
D) approaches a vertical straight line.
E) none of the above.

Question 31

All of the following are assumptions of the Markowitz model except

A) Risk is measured based on the variability of returns.
B) Investors maximize one-period expected utility.
C) Investors' utility curves demonstrate properties of diminishing marginal utility of wealth.
D) Investors base decisions solely on expected return and time.
E) All of the above.

Question 32

The slope of the utility curves for a strongly risk-averse investor, relative to the slope of the utility curves for a less risk-averse investor, will

A) Be steeper.
B) Be flatter.
C) Be vertical.
D) Be horizontal.
E) None of the above.

Question 33

A positive relationship between expected return and expected risk is consistent with

A) investors being risk seekers.
B) investors being risk avoiders.
C) investors being risk averse.
D) all of the above.
E) none of the above.

Question 34

A portfolio manager is considering adding another security to his portfolio. The correlations of the five alternatives available are listed below. Which security would enable the highest level of risk diversification?

A) 0.0
B) 0.25
C) -0.25
D) -0.75
E) 1.0

Question 35

The slope of the efficient frontier is calculated as follows

A) E(Rportfolio)/E(sportfolio)
B) E(sportfolio)/E(Rportfolio)
C) DE(Rportfolio)/DE(sportfolio)
D) DE(sportfolio)/DE(Rportfolio)
E) None of the above

Question 36

An individual investor's utility curves specify the tradeoffs he or she is willing to make between

A) high risk and low risk assets.
B) high return and low return assets.
C) covariance and correlation.
D) return and risk.
E) efficient portfolios.

Question 37

The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement together.

A) Absolute
B) Relative
C) Indexed
D) Loglinear
E) Squared

Question 38

When is a portfolio considered to be efficient?

A) When no other portfolio offers higher expected returns with the same risk.
B) When no other portfolio offers lower risk with the same expected return.
C) When there is no portfolio with a higher return.
D) Choices a and b
E) All of the above.

Question 39

What will happen to the return, if equal risk is added moving along the envelope curve containing the best possible combinations?

A) Decrease at an increasing rate.
B) Decrease at a decreasing rate.
C) Increase at an increasing rate.
D) Increase at a decreasing rate.
E) Remain constant.

Question 40

Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s).

A) One
B) Two
C) Three
D) Four
E) Five

Question 41

Exhibit 6-3
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset (A) } & \text { Asset (B) } \\\hline E\left(R_{A}\right)=9 \% & E\left(R_{B}\right)=11 \% \\\left(\sigma_{A}\right)=4 \% & \left(\sigma_{B}\right)=6 \% \\W_{A}=0.4 & W_{B}=0.6\end{array}\\\mathrm{COV}_{\mathrm{A,B}}=0.0011\end{array}$

-Refer to Exhibit 6-3. What is the standard deviation of this portfolio?

A) 3.68%
B) 4.56%
C) 4.99%
D) 5.16%
E) 6.02%

Question 42

Between 1989 and 1999, the standard deviation of the returns for the S&P/TSX and the DJIA indexes were 0.19 and 0.06, respectively, and the covariance of these index returns was 0.0014. What was the correlation coefficient between the two market indicators?

A) 8.1428
B) 0.0233
C) 0.0073
D) 0.2514
E) 0.1228

Question 43

Between 1989and 2009, the standard deviation of the returns for the S&P/TSX and the DJIA indexes were 0.08 and 0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the two market indicators?

A) .0906
B) .0985
C) .0796
D) .0875
E) .0654

Question 44

Exhibit 6-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=10 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=8 \% \\\left(\sigma_{\mathrm{A}}\right)=6 \% & \left(\sigma_{\mathrm{B}}\right)=5 \% \\\mathrm{~W}_{\mathrm{A}}=0.3 & \mathrm{~W}_{\mathrm{B}}=0.7\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0008\end{array}$

-Refer to Exhibit 6-4. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 8.6%
B) 8.1%
C) 9.3%
D) 10.2%
E) 11.6%

Question 45

Between 2000 and 2010, the standard deviation of the returns for the TSX Venture and the S&P/TSX indexes were 0.27 and 0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the two market indicators?

A) 1.26
B) 0.7937
C) 0.2142
D) 0.1111
E) 0.44

Question 46

A portfolio of two securities that are perfectly positively correlated has

A) A standard deviation that is the weighted average of the individual securities standard deviations.
B) An expected return that is the weighted average of the individual securities expected returns.
C) No diversification benefit over holding either of the securities independently.
D) Choices b and c
E) All of the above.

Question 47

Exhibit 6-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $$\begin{array} { c c } \text { Asset } ( A ) & \text { Asset } ( B ) \\\hline E \left( R _ { A } \right) = 10 \% & E \left( R _ { B } \right) = 15 \% \\\left( \sigma _ { A } \right) = 8 \% & \left( \sigma _ { B } \right) = 9.5 \% \\W _ { A } = 0.25 & W _ { B } = 0.75 \\\operatorname { Cov } _ { A , B } = 0.006\end{array}$$

-Refer to Exhibit 6-1. What is the standard deviation of this portfolio?

A) 8.79%
B) 13.75%
C) 12.5%
D) 7.72%
E) 5.64%

Question 48

Between 1999 and 2009, the standard deviation of the returns for the S&P/TSX and the DJIA indexes were 0.18 and 0.16, respectively, and the covariance of these index returns was 0.003. What was the correlation coefficient between the two market indicators?

A) 9.6
B) 0.0187
C) 0.1042
D) 0.0166
E) 0.343

Question 49

What is the expected return of the three-stock portfolio described below? $\begin{array}{lcc}\text { Common Stock } & \text { Market Value } & \text { Expected Return } \\\hline \text { Alko Inc. } & 25,000 & 38 \% \\\text { Belmont Co. } & 100,000 & 10 \% \\\text { Cardo Inc. } & 75,000 & 16 \%\end{array}$

A) 21.33%
B) 12.50%
C) 32.00%
D) 15.75%
E) 16.80%

Question 50

What is the expected return of the three-stock portfolio described below? $\begin{array}{lcc}\text { Common Stock } & \text { Market Value } & \text { Expected Return } \\\hline\text { Lupko Inc. } & 50,000 & 13 \% \\\text { Mackey Co. } & 25,000 & 9 \% \\\text { Nippon Inc. } & 75,000 & 14 \%\end{array}$

A) 12.04%
B) 12.83%
C) 13.07%
D) 15.89%
E) 17.91%

Question 51

Exhibit 6-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset (A) } & \text { Asset (B) } \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=25 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=15 \% \\\left(\sigma_{\mathrm{A}}\right)=18 \% & \left(\sigma_{\mathrm{B}}\right)=11 \% \\\mathrm{~W}_{\mathrm{A}}=0.75 & \mathrm{~W}_{\mathrm{B}}=0.25\\\end{array}\\\mathrm{COV}_{\mathrm{ABB}}=-0.0009\end{array}$

-Refer to Exhibit 6-2. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 18.64%
B) 20.0%
C) 22.5%
D) 13.65%
E) 11%

Question 52

What is the expected return of the three-stock portfolio described below? $\begin{array}{lcc}\text { Common Stock } & \text { Market Value } & \text { Expected Return } \\\hline \text { Xerox } & 125,000 & 8 \% \\\text { Yelcon } & 250,000 & 25 \% \\\text { Zwiebal } & 175,000 & 16 \%\end{array}$

A) 18.27%
B) 14.33%
C) 16.33%
D) 12.72%
E) 16.45%

Question 53

Exhibit 6-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset (A) } & \text { Asset (B) } \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=25 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=15 \% \\\left(\sigma_{\mathrm{A}}\right)=18 \% & \left(\sigma_{\mathrm{B}}\right)=11 \% \\\mathrm{~W}_{\mathrm{A}}=0.75 & \mathrm{~W}_{\mathrm{B}}=0.25\\\end{array}\\\mathrm{COV}_{\mathrm{ABB}}=-0.0009\end{array}$

-Refer to Exhibit 6-2. What is the standard deviation of this portfolio?

A) 5.45%
B) 18.64%
C) 20.0%
D) 22.5%
E) 13.65%

Question 54

Exhibit 6-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=10 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=8 \% \\\left(\sigma_{\mathrm{A}}\right)=6 \% & \left(\sigma_{\mathrm{B}}\right)=5 \% \\\mathrm{~W}_{\mathrm{A}}=0.3 & \mathrm{~W}_{\mathrm{B}}=0.7\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0008\end{array}$

-Refer to Exhibit 6-4. What is the standard deviation of this portfolio?

A) 5.02%
B) 3.88%
C) 6.21%
D) 4.04%
E) 4.34%

Question 55

Exhibit 6-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $$\begin{array} { c c } \text { Asset } ( A ) & \text { Asset } ( B ) \\\hline E \left( R _ { A } \right) = 10 \% & E \left( R _ { B } \right) = 15 \% \\\left( \sigma _ { A } \right) = 8 \% & \left( \sigma _ { B } \right) = 9.5 \% \\W _ { A } = 0.25 & W _ { B } = 0.75 \\\operatorname { Cov } _ { A , B } = 0.006\end{array}$$

-Refer to Exhibit 6-1. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 8.79%
B) 12.5%
C) 13.75%
D) 7.72%
E) 12%

Question 56

What is the expected return of the three-stock portfolio described below? $\begin{array}{lcc}\text { Common Stock } & \text { Market Value } & \text { Expected Return } \\\hline \text { Ando Inc. } & 95,000 & 12.0 \% \\\text { Bee Co. } & 32,000 & 8.75 \% \\\text { Cool Inc. } & 65,000 & 17.7 \%\end{array}$

A) 18.45%
B) 12.82%
C) 13.38%
D) 15.27%
E) 16.67%

Question 57

Between 1985 and 1995, the standard deviation of the returns for the S&P/TSX and the TSX Venture indexes were 0.06 and 0.07, respectively, and the covariance of these index returns was 0.0008. What was the correlation coefficient between the two market indicators?

A) .1525
B) .1388
C) .1458
D) .1622
E) .1064

Question 58

What is the expected return of the three-stock portfolio described below? $\begin{array}{lcc}\text { Common Stock } & \text { Market Value } & \text { Expected Return } \\\hline\text { Delton Inc. } & 50,000 & 10 \% \\\text { Efley Co. } & 40,000 & 11 \% \\\text { Grippon Inc. } & 60,000 & 16 \%\end{array}$

A) 14.89%
B) 16.22%
C) 12.66%
D) 13.85%
E) 16.99%

Question 59

Exhibit 6-3
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset (A) } & \text { Asset (B) } \\\hline E\left(R_{A}\right)=9 \% & E\left(R_{B}\right)=11 \% \\\left(\sigma_{A}\right)=4 \% & \left(\sigma_{B}\right)=6 \% \\W_{A}=0.4 & W_{B}=0.6\end{array}\\\mathrm{COV}_{\mathrm{A,B}}=0.0011\end{array}$

-Refer to Exhibit 6-3. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 8.95%
B) 9.30%
C) 9.95%
D) 10.20%
E) 10.70%

Question 60

Between 1998 and 2008, the standard deviation of the returns for the NYSE and the DJIA indexes were 0.10 and 0.09, respectively, and the covariance of these index returns was 0.0009. What was the correlation coefficient between the two market indicators?

A) .1000
B) .1100
C) .1258
D) .1322
E) .1164

Question 61

Exhibit 6-11
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset 1 } & \text { Asset 2 } \\\hline E\left(R_{1}\right)=0.28 & E\left(R_{2}\right)=0.12 \\E\left(\sigma_{1}\right)=0.15 & E\left(\sigma_{2}\right)=0.11 \\W_{1}=0.42 & W_{2}=0.58\end{array}\\r_{1,2}=0.7\end{array}$

-Refer to Exhibit 6-11. Calculate the expected standard deviation of the two-stock portfolio.

A) 0.1367
B) 0.1872
C) 0.1169
D) 0.20
E) 0.3950

Question 62

Exhibit 6-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(A) & \text { Asset }(B) \\\hline E\left(R_{A}\right)=16 \% & E\left(R_{B}\right)=10 \% \\\left(\sigma_{A}\right)=9 \% & \left(\sigma_{B}\right)=7 \% \\W_{A}=0.5 & W_{B}=0.5\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0009\end{array}$

-Refer to Exhibit 6-6. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 10.6 %
B) 10.2%
C) 13.0%
D) 11.9%
E) 14.0%

Question 63

Exhibit 6-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=18 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=13 \% \\\left(\sigma_{\mathrm{A}}\right)=7 \% & \left(\sigma_{\mathrm{B}}\right)=6 \% \\\mathrm{~W}_{\mathrm{A}}=0.3 & \mathrm{~W}_{\mathrm{B}}=0.7\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0011\end{array}$

-Refer to Exhibit 6-9. What is the standard deviation of this portfolio?

A) 5.16%
B) 5.89%
C) 6.11%
D) 6.57%
E) 7.02%

Question 64

Exhibit 6-12
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{cc}\text { Asset 1 } & \text { Asset 2 } \\\hline E\left(R_{1}\right)=.12 & E\left(R_{2}\right)=.16 \\E\left(\sigma_{1}\right)=.04 & E\left(\sigma_{2}\right)=.06\end{array}$

-Refer to Exhibit 6-12. Calculate the expected returns and expected standard deviations of a two-stock portfolio when r?,? = .80 and w? = .60.

A) .144 and .0002
B) .144 and .0018
C) .136 and .0045
D) .136 and .0455
E) .136 and .4554

Question 65

Exhibit 6-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=10 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=14 \% \\\left(\sigma_{\mathrm{A}}\right)=7 \% & \left(\sigma_{\mathrm{B}}\right)=8 \% \\\mathrm{~W}_{\mathrm{A}}=0.7 & \mathrm{~W}_{\mathrm{B}}=0.3\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0013\end{array}$

-Refer to Exhibit 6-8. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 6.4%
B) 9.1%
C) 10.2%
D) 10.8%
E) 11.2%

Question 66

Exhibit 6-12
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{cc}\text { Asset 1 } & \text { Asset 2 } \\\hline E\left(R_{1}\right)=.12 & E\left(R_{2}\right)=.16 \\E\left(\sigma_{1}\right)=.04 & E\left(\sigma_{2}\right)=.06\end{array}$

-Refer to Exhibit 6-12. Calculate the expected return and expected standard deviation of a two-stock portfolio when r?,? = -.60 and w? = .75.

A) .13 and .0024
B) .13 and .0455
C) .12 and .0585
D) .12 and .5585
E) .13 and .6758

Question 67

Exhibit 6-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=7 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=9 \% \\\left(\sigma_{\mathrm{A}}\right)=6 \% & \left(\sigma_{\mathrm{B}}\right)=5 \% \\\mathrm{~W}_{\mathrm{A}}=0.6 & \mathrm{~W}_{\mathrm{B}}=0.4\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0014\end{array}$

-Refer to Exhibit 6-7. What is the standard deviation of this portfolio?

A) 4.87%
B) 3.62%
C) 4.13%
D) 5.76%
E) 6.02%

Question 68

Exhibit 6-13
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period. $\begin{array}{cc}\text { Probability } & \text { Return } \\\hline 0.10 & -.20 \\0.25 & -.05 \\0.40 & 0.15 \\0.25 & 0.30\end{array}$

-Refer to Exhibit 6-13. Calculate the expected return for Magnum Oil.

A) 5.0
B) 10.3%
C) 13.7%
D) 17.5%
E) 20.0%

Question 69

Exhibit 6-8
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=10 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=14 \% \\\left(\sigma_{\mathrm{A}}\right)=7 \% & \left(\sigma_{\mathrm{B}}\right)=8 \% \\\mathrm{~W}_{\mathrm{A}}=0.7 & \mathrm{~W}_{\mathrm{B}}=0.3\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0013\end{array}$

-Refer to Exhibit 6-8. What is the standard deviation of this portfolio?

A) 4.51%
B) 5.94%
C) 6.75%
D) 7.09%
E) 8.62%

Question 70

Exhibit 6-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=18 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=13 \% \\\left(\sigma_{\mathrm{A}}\right)=7 \% & \left(\sigma_{\mathrm{B}}\right)=6 \% \\\mathrm{~W}_{\mathrm{A}}=0.3 & \mathrm{~W}_{\mathrm{B}}=0.7\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0011\end{array}$

-Refer to Exhibit 6-9. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 10.10%
B) 11.60%
C) 13.88%
D) 14.50%
E) 15.37%

Question 71

Exhibit 6-12
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{cc}\text { Asset 1 } & \text { Asset 2 } \\\hline E\left(R_{1}\right)=.12 & E\left(R_{2}\right)=.16 \\E\left(\sigma_{1}\right)=.04 & E\left(\sigma_{2}\right)=.06\end{array}$

-Consider two securities, A and B. Security A and B have a correlation coefficient of 0.65. Security A has standard deviation of 12, and security B has standard deviation of 25. Calculate the covariance between these two securities.

A) 300
B) 461.54
C) 261.54
D) 195
E) 200

Question 72

Exhibit 6-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(A) & \text { Asset }(B) \\\hline E\left(R_{A}\right)=16 \% & E\left(R_{B}\right)=10 \% \\\left(\sigma_{A}\right)=9 \% & \left(\sigma_{B}\right)=7 \% \\W_{A}=0.5 & W_{B}=0.5\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0009\end{array}$

-Refer to Exhibit 6-6. What is the standard deviation of this portfolio?

A) 6.08%
B) 5.89%
C) 7.06%
D) 6.54%
E) 7.26%

Question 73

Exhibit 6-10
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=16 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=14 \% \\\left(\sigma_{\mathrm{A}}\right)=3 \% & \left(\sigma_{\mathrm{B}}\right)=8 \% \\\mathrm{~W}_{\mathrm{A}}=0.5 & \mathrm{~W}_{\mathrm{B}}=0.5\end{array}\\\mathrm{COV}_{\mathrm{A,B}}=0.0014\end{array}$

-Refer to Exhibit 6-10. What is the standard deviation of this portfolio?

A) 3.02%
B) 4.88%
C) 5.24%
D) 5.98%
E) 6.52%

Question 74

Exhibit 6-10
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=16 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=14 \% \\\left(\sigma_{\mathrm{A}}\right)=3 \% & \left(\sigma_{\mathrm{B}}\right)=8 \% \\\mathrm{~W}_{\mathrm{A}}=0.5 & \mathrm{~W}_{\mathrm{B}}=0.5\end{array}\\\mathrm{COV}_{\mathrm{A,B}}=0.0014\end{array}$

-Refer to Exhibit 6-10. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 11%
B) 12%
C) 13%
D) 14%
E) 15%

Question 75

Exhibit 6-11
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset 1 } & \text { Asset 2 } \\\hline E\left(R_{1}\right)=0.28 & E\left(R_{2}\right)=0.12 \\E\left(\sigma_{1}\right)=0.15 & E\left(\sigma_{2}\right)=0.11 \\W_{1}=0.42 & W_{2}=0.58\end{array}\\r_{1,2}=0.7\end{array}$

-Refer to Exhibit 6-11. Calculate the expected return of the two-stock portfolio.

A) 0.107
B) 0.1367
C) 0.1169
D) 0.1872
E) 0.20

Question 76

Exhibit 6-12
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{cc}\text { Asset 1 } & \text { Asset 2 } \\\hline E\left(R_{1}\right)=.12 & E\left(R_{2}\right)=.16 \\E\left(\sigma_{1}\right)=.04 & E\left(\sigma_{2}\right)=.06\end{array}$

-Given the following weights and expected security returns, calculate the expected return for the portfolio. $\begin{array}{cc}\text { Weight } & \text { Expected Return } \\\hline .20 & .06 \\.25 & .08 \\.30 & .10 \\.25 & 12\end{array}$

A) 0.085
B) 0.090
C) 0.092
D) 0.097
E) None of the above

Question 77

Exhibit 6-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=8 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=15 \% \\\left(\sigma_{\mathrm{A}}\right)=7 \% & \left(\sigma_{\mathrm{B}}\right)=10 \% \\\mathrm{~W}_{\mathrm{A}}=0.4 & \mathrm{~W}_{\mathrm{B}}=0.6\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0006\end{array}$

-Refer to Exhibit 6-5. What is the standard deviation of this portfolio?

A) 3.89%
B) 4.61%
C) 5.02%
D) 6.83%
E) 6.09%

Question 78

Exhibit 6-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=8 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=15 \% \\\left(\sigma_{\mathrm{A}}\right)=7 \% & \left(\sigma_{\mathrm{B}}\right)=10 \% \\\mathrm{~W}_{\mathrm{A}}=0.4 & \mathrm{~W}_{\mathrm{B}}=0.6\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0006\end{array}$

-Refer to Exhibit 6-5. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 8.0%
B) 12.2%
C) 7.4%
D) 9.1%
E) 11.6%

Question 79

Exhibit 6-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{c}\begin{array}{cc}\text { Asset }(\mathrm{A}) & \text { Asset }(\mathrm{B}) \\\hline \mathrm{E}\left(\mathrm{R}_{\mathrm{A}}\right)=7 \% & \mathrm{E}\left(\mathrm{R}_{\mathrm{B}}\right)=9 \% \\\left(\sigma_{\mathrm{A}}\right)=6 \% & \left(\sigma_{\mathrm{B}}\right)=5 \% \\\mathrm{~W}_{\mathrm{A}}=0.6 & \mathrm{~W}_{\mathrm{B}}=0.4\end{array}\\\mathrm{COV}_{\mathrm{AB}}=0.0014\end{array}$

-Refer to Exhibit 6-7. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation (?_i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 5.8%
B) 6.1%
C) 6.9%
D) 7.8%
E) 8.9%

Question 80

Exhibit 6-12
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{cc}\text { Asset 1 } & \text { Asset 2 } \\\hline E\left(R_{1}\right)=.12 & E\left(R_{2}\right)=.16 \\E\left(\sigma_{1}\right)=.04 & E\left(\sigma_{2}\right)=.06\end{array}$

-Calculate the expected return for a three-asset portfolio with the following $\begin{array}{cccc}\text { Asset } & \text { Exp. Ret. } & \text { Std. Dev } & \text { Weight } \\\hline \text { A } & 0.0675 & 0.12 & 0.25 \\\text { B } & 0.1235 & 0.1675 & 0.35 \\\text { C } & 0.1425 & 0.1835 & 0.40\end{array}$

A) 11.71%
B) 11.12%
C) 15.70%
D) 14.25%
E) 6.75%.