Deck 6: An Introduction to Portfolio Management

Question 1

Risk is defined as the uncertainty of future outcomes.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

A good portfolio is a collection of individually good assets.

Question 6

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 7

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.

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

Investors choose a portfolio on the efficient frontier based on their utility functions that reflect their attitudes towards risk.

Question 16

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

Question 17

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 18

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

Question 19

The set of portfolios with the maximum rate of return for every given risk level is known as the optimal frontier.

Question 20

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

Question 21

The market portfolio consists of all risky assets.

Question 22

Semivariance, 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 23

Studies have shown that a well-diversified investor needs as few as five stocks.

Question 24

The portfolios on the capital market line are combinations of the risk-free asset and the market portfolio.

Question 25

One of the assumptions of capital market theory is that investors can borrow or lend at the risk-free rate.

Question 26

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 27

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) there are no tax costs involved.

Question 28

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 29

Because many of the assumptions made by the capital market theory are unrealistic, the theory is NOT applicable in the real world.

Question 30

If you borrow money at the RFR and invest the money in the market portfolio, the rate of return on your portfolio will be higher than the market rate of return.

Question 31

What is the expected return of the three-stock portfolio described below?

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

Question 32

A risk-free asset is one in which the return is completely guaranteed; there is no uncertainty.

Question 33

The capital market line is the tangent line between the risk-free rate of return and the efficient frontier.

Question 34

What is the expected return of the three-stock portfolio described below?

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

Question 35

When individuals evaluate their portfolios, they should evaluate

A) all the U.S. and non-U.S. stocks.
B) all marketable securities.
C) all marketable securities and other liquid assets.
D) all assets.
E) all assets and liabilities.

Question 36

What is the expected return of the three-stock portfolio described below?

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

Question 37

The Markowitz model is based on several assumptions regarding investor behavior. 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 these are correct (that is, all are assumptions of the Markowitz model).

Question 38

What is the expected return of the three-stock portfolio described below?

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

Question 39

The introduction of lending and borrowing severely limits the available risk/return opportunities.

Question 40

16.99%What is the expected return of the three-stock portfolio described below?

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

Question 41

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)


-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 ( $\sigma$ 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 42

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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 43

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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 44

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)


-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 ( $\sigma$ 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 45

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-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 ( $\sigma$ 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 46

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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) 5.64%

Question 47

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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 48

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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 49

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
​

-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 ( $\sigma$ 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 50

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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 51

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-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 ( $\sigma$ 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 52

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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 53

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-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 ( $\sigma$ 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 54

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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 55

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
​
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 56

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)


-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 ( $\sigma$ 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 57

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-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 ( $\sigma$ 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 58

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-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 ( $\sigma$ 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 59

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)


-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 ( $\sigma$ 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 60

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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 61

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 62

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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 63

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 64

What is the standard deviation of an equally weighted portfolio of two stocks with a covariance of 0.009, if the standard deviation of the first stock is 15% and the standard deviation of the second stock is 20%?

A) 2.0%
B) 2.1%
C) 7.8%
D) 14.2%
E) 14.7%

Question 65

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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 66

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Based on the economic outlook for the industry, a financial analyst covering Top Choice Corporation has determined the following three possible returns given three different states of the economy over the next period.

Refer to Exhibit 6.16. What is the standard deviation for Top Choice Corporation?

A) 0.1 percent
B) 6.3 percent
C) 7.9 percent
D) 9.4 percent
E) 12.1 percent

Question 67

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed.


-Refer to Exhibit 6.14. What is the standard deviation of the stock A and B portfolio?

A) 0.0%
B) 0.5%
C) 4.1%
D) 6.9%
E) 20.3%

Question 68

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A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period.

Refer to Exhibit 6.13. Calculate the standard deviation for Magnum Oil.

A) 0 percent
B) 11 percent
C) 16 percent
D) 20 percent
E) 26 percent

Question 69

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 70

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Based on the economic outlook for the industry, a financial analyst covering Top Choice Corporation has determined the following three possible returns given three different states of the economy over the next period.

Refer to Exhibit 6.16. What is the expected return for Top Choice Corporation?

A) 5.2 percent
B) 10.4 percent
C) 13.7 percent
D) 15.0 percent
E) 17.6 percent

Question 71

USE THE INFORMATION BELOW FOR THE FOLLOWING 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.

Refer to Exhibit 6.13. Calculate the expected return for Magnum Oil.

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

Question 72

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Refer to Exhibit 6.15. What is the standard deviation of this portfolio?

A) 10.0%
B) 12.5%
C) 14.4%
D) 15.5%
E) 16.0%

Question 73

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed.


-Refer to Exhibit 6.14. What is the expected return of the stock A and B portfolio?

A) 17.0%
B) 17.5%
C) 18.0%
D) 18.5%
E) 19.0%

Question 74

Given the following weights and expected security returns, calculate the expected return for the portfolio.

A) 0.085
B) 0.090
C) 0.092
D) 0.097
E) 0.099

Question 75

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Refer to Exhibit 6.12. Calculate the expected returns and expected standard deviations of a two-stock portfolio when r_1,2 = .80 and w₁ = .60.

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

Question 76

Calculate the expected return for a three-asset portfolio with the following

A) 11.71 percent
B) 11.12 percent
C) 15.70 percent
D) 14.25 percent
E) 6.75 percent

Question 77

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-Refer to Exhibit 6.12. Calculate the expected return and expected standard deviation of a two-stock portfolio when r_1,2 = -0.60 and w₁ = .75.

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

Question 78

All of the following are common risk measurements EXCEPT

A) standard deviation.
B) variance.
C) semivariance.
D) covariance.
E) range of returns.

Question 79

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-Refer to Exhibit 6.15. What is the expected return of a portfolio of two risky assets if the expected return E(R_i), standard deviation ( $\sigma$ i), covariance (COV_i,j), and asset weight (W_i) are as shown above?

A) 13.8%
B) 14.6%
C) 15.0%
D) 15.2%
E) 16.8%

Question 80

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed.


-Refer to Exhibit 6.14. What percentage of stock A should be invested to obtain the minimum risk portfolio that contains stock A and B?

A) 35%
B) 42%
C) 58%
D) 65%
E) 72%