Question 1

The dominant portfolio with the lowest possible level of risk out of a set of portfolios consisting of two securities is referred to as the
A)efficient frontier.
B)minimum variance portfolio.
C)upper tail of the efficient set.
D)tangency portfolio.
E)risk-free portfolio.

Accepted Answer

The minimum variance portfolio is the portfolio with the lowest level of risk out of a set of portfolios consisting of two securities. It is the portfolio that optimizes risk reduction by combining the securities in the most efficient way. The other options (A, C, D, E) do not accurately describe the concept of the minimum variance portfolio.

Question 2

Angelo anticipates earning a rate of return of 11.4 percent on his portfolio next year.The 11.4 percent is referred to as the
A)expected return.
B)future return.
C)holding period return.
D)actual return.
E)average return.

Accepted Answer

The 11.4 percent rate of return is referred to as the expected return as it is the anticipated return that Angelo expects to earn on his portfolio.

Question 3

A negative covariance between the returns of Stock A and Stock B indicates that
A)market prices of Stock A and Stock B move in tandem when their returns are declining.
B)the return on one stock will exceed that stock's average return when the second stock has a return that is less than its average.
C)a portfolio investing equally in Stocks A and B will have a negative expected rate of return.
D)both Stock A and Stock B have negative rates of return for the period.
E)one stock has a negative rate of return while the other stock has a positive rate of return for the period.

Accepted Answer

Negative covariance between two stocks indicates that when one stock's return is above its average, the other's is likely to be below its average, and vice versa. This does not necessarily imply negative expected returns, synchronized market movements, or that one stock must have a negative return while the other has a positive return.

Question 4

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of
A)−1
B)−0.5
C)0
D)0)5
E)1

Accepted Answer

A correlation of -1 indicates perfect negative correlation between the two securities in the portfolio. This means that when one stock goes up, the other stock goes down by the same amount, and vice versa. Therefore, combining two negatively correlated stocks in a portfolio will result in diversification benefits and the highest reduction in market risk.

Question 5

If a stock portfolio is well diversified,then the portfolio variance
A)must be equal to or greater than the variance of the least risky stock in the portfolio.
B)will be a weighted average of the variances of the individual securities in the portfolio.
C)will equal the variance of the most volatile stock in the portfolio.
D)will be an arithmetic average of the variances of the individual securities in the portfolio.
E)may be less than the variance of the least risky stock in the portfolio.

Accepted Answer

A well-diversified portfolio can have a variance that is lower than the variance of any single stock within it, due to the benefits of diversification which can reduce unsystematic risk.

Question 6

Which one of the following statements is correct concerning the standard deviation of a portfolio?
A)Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
B)The greater the diversification of a portfolio,the greater the standard deviation of that portfolio.
C)Standard deviation measures only the systematic risk of a portfolio.
D)The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
E)The standard deviation of a portfolio must equal the weighted average of the standard deviations of the individual securities held within the portfolio.

Accepted Answer

The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio. This is the basic principle behind portfolio diversification. By combining different securities, an investor can reduce the overall risk of the portfolio without sacrificing returns. Therefore, the standard deviation of a well-diversified portfolio should be lower than the weighted average of the standard deviations of its individual securities.

Question 7

Which one of these measures the squared deviations of actual returns from expected returns?
A)Variance
B)Covariance
C)Beta
D)Correlation
E)Alpha

Accepted Answer

Variance measures the variability of returns around the mean, or in other words, the squared deviations of actual returns from expected returns.

Question 8

When computing the expected return on a portfolio of stocks the portfolio weights are based on the
A)number of shares owned in each stock.
B)price per share of each stock.
C)market value of the total shares held in each stock.
D)original amount invested in each stock.
E)cost per share of each stock held.

Accepted Answer

The portfolio weights are based on the market value of the total shares held in each stock, as this takes into account both the number of shares owned and the price per share. The original amount invested or cost per share may vary based on when the shares were purchased, and would not accurately reflect the current value of the portfolio.

Question 9

You plotted the monthly rate of return for two securities against time for the past 48 months.If the pattern of the movements of these two sets of returns rose and fell together the majority,but not all,of the time,then the securities have
A)no correlation at all.
B)a weak negative correlation.
C)a strong negative correlation.
D)a strong positive correlation.
E)a perfect positive correlation.

Accepted Answer

If the two securities rose and fell together for the majority of the time, it suggests a strong positive correlation between them. A weak correlation or no correlation would mean that the securities move independently of each other, which is not the case here. A negative correlation would mean that the securities move in opposite directions, which is not what the question states. A perfect positive correlation would mean that the two securities always move together, which is not realistic over a long period of time. Therefore, the best choice is a strong positive correlation (Option D).

Question 10

Which one of these measures the interrelationship between two securities?
A)Standard deviation
B)Variance
C)Beta
D)Covariance
E)Alpha

Accepted Answer

Covariance measures the interrelationship between two securities by calculating how much they move together. A positive covariance indicates that the securities move together, while a negative covariance indicates they move in opposite directions. Standard deviation and variance measure the volatility of a single security, while beta measures the systematic risk of a security relative to the market. Alpha measures the excess return of a security compared to its benchmark.

Question 11

Assume two securities are negatively correlated.If these two securities are combined into an equally weighted portfolio,the portfolio standard deviation must be
A)equal to the standard deviation of the overall market.
B)equal to the arithmetic average of the standard deviations of the individual securities.
C)equal to zero.
D)less than the weighted average of the standard deviations of the individual securities.
E)equal to or greater than the lowest standard deviation of the two securities.

Accepted Answer

When two securities are negatively correlated, their combination results in reduced portfolio risk. The portfolio standard deviation is a function of not only the individual standard deviations but also the correlation between the two securities. As the two securities are negatively correlated, their combination results in a lower portfolio standard deviation than the weighted average of the standard deviations of the individual securities. Therefore, the portfolio standard deviation must be less than the weighted average of the standard deviations of the individual securities. Choice D is the only option that captures this explanation.

Question 12

For an individual investor,the ideal portfolio could best be described as the portfolio that
A)has the lowest standard deviation given a specific expected rate of return.
B)lies above and to the left of the feasible set.
C)produces the highest rate of return.
D)qualifies as the minimum variance portfolio.
E)lies within the feasible set.

Accepted Answer

The ideal portfolio for an individual investor is one that achieves the lowest possible risk (standard deviation) for a given level of expected return. This aligns with modern portfolio theory, which emphasizes the importance of balancing risk and return.

Question 13

The standard deviation of a portfolio will tend to increase when
A)the portfolio concentration in a single cyclical industry increases.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to any other stock in the portfolio.
C)a risky asset in the portfolio is replaced with U.S.Treasury bills.
D)the weights of the various diverse securities become more evenly distributed.
E)short-term bonds are replaced with Treasury Bills.

Accepted Answer

When the portfolio concentration in a single cyclical industry increases, the portfolio becomes less diversified, and the overall risk of the portfolio increases. This increase in risk will result in an increase in the standard deviation of the portfolio.

Question 14

The portfolio expected return considers which of the following factors? I.The amount of money currently invested in each individual security
II)Various levels of economic activity
III)The performance of each stock given various economic scenarios
IV)The probability of various states of the economy occurring
A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV only

Accepted Answer

The portfolio expected return calculation considers the amount of money invested in each security (I), different levels of economic activity (II), the performance of each stock under various economic scenarios (III), and the probability of different economic states occurring (IV). These factors together help in assessing the expected return by taking into account both the investment distribution and the economic conditions that could affect the portfolio's performance.

Question 15

If there is no diversification benefit derived from combining two risky stocks into one portfolio,then the
A)returns on the two stocks must move perfectly in sync with one another.
B)returns on the two stocks must move perfectly opposite of one another.
C)stocks must have a zero correlation.
D)portfolio is equally weighted between the two stocks.
E)two stocks are completely unrelated to one another.

Accepted Answer

The absence of diversification benefits implies that the returns on the two stocks move perfectly in sync with one another, meaning they have a correlation coefficient of +1. This perfect positive correlation means that the stocks' returns move in the same direction to the same degree, eliminating the potential for diversification to reduce risk.

Question 16

Which statement correctly applies to the feasible set of returns for a portfolio consisting of domestic stocks,A and B? Assume that the expected returns are plotted against standard deviations.
A)Any combination of Stock A and Stock B that plot to the right of the minimum variance portfolio is an efficient portfolio.
B)Given any specific level of risk,the maximum obtainable rate of return will plot on the efficient frontier.
C)The minimum variance portfolio will move to the right on the risk-return graph if foreign securities are added to the portfolio.
D)To obtain the highest possible return,the portfolio return and standard deviation should plot above the feasible set.
E)The higher the correlation between Stocks A and B,the greater the bend in the curve of the feasible set.

Accepted Answer

The efficient frontier represents the set of portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return. Therefore, given any specific level of risk, the maximum obtainable rate of return will plot on the efficient frontier. Option A is incorrect as the minimum variance portfolio is not necessarily an efficient portfolio; it is simply the portfolio with the lowest volatility. Option C is incorrect as the minimum variance portfolio may not necessarily move to the right with the addition of foreign securities, depending on the correlation and other factors. Option D is incorrect as the feasible set represents the range of possible returns and risks for a given set of securities, and the highest possible return will still fall within the feasible set. Option E is incorrect as the shape of the feasible set is influenced by several factors, such as the correlation between securities, but the correlation does not necessarily lead to a greater bend in the curve.

Question 17

The expected return on a portfolio
A)can be greater than the expected return on the best performing security in the portfolio.
B)can be less than the expected return on the worst performing security in the portfolio.
C)is independent of the performance of the overall economy.
D)is limited by the returns on the individual securities within the portfolio.
E)is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal.

Accepted Answer

The expected return on a portfolio is a weighted average of the expected returns of the individual securities, so it is limited by the returns on those securities.

Question 18

Which one of these statements is correct regarding a portfolio of two risky securities?
A)Both the rate of return and the standard deviation of a portfolio can be changed by changing the portfolio weights.
B)The opportunity set is represented by a forward bending curve when expected returns are graphed against standard deviation.
C)Diversification occurs when the correlation between two securities is +1.
D)The standard deviation of a portfolio cannot be lower than the weighted average standard deviation of the securities held within the portfolio.
E)The minimum variance portfolio of two stocks also represents the portfolio's highest possible rate of return.

Accepted Answer

The portfolio weights determine both the rate of return and standard deviation of a portfolio. By changing the weights, the portfolio can be made more or less risky, and the expected rate of return can be increased or decreased accordingly.

Question 19

The covariance of two securities is
A)equal to the variance of one security divided by the variance of the second security.
B)zero when the securities are positively related.
C)expressed as a squared value.
D)limited to a range of 0 to +1.
E)unaffected by any changes in the probabilities of various states of the economy occurring.

Accepted Answer

The answer of The covariance of two securities is
A)equal to...

Question 20

The correlation between stocks A and B is equal to the A)standard deviation of A divided by the standard deviation of B. B)covariance_AB divided by the product of the standard deviations of A and B. C)standard deviation of B divided by the covariance_AB. D)sum of the variances of A and B divided by the covariance_AB. E)product of the standard deviation of A multiplied by the standard deviation of B divided by covariance_AB.

Accepted Answer

The correlation between A and B is equal to their covariance divided by the product of their standard deviations (i.e. Covariance_AB. / SD(A)*SD(B)). This is exactly what choice B says, therefore it is the correct answer.

Quiz 11: Return Amcq Risk: the Capital Asset Pricing Model Capm

The dominant portfolio with the lowest possible level of risk out of a set of portfolios consisting of two securities is referred to as the

Angelo anticipates earning a rate of return of 11.4 percent on his portfolio next year.The 11.4 percent is referred to as the

A negative covariance between the returns of Stock A and Stock B indicates that

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of

If a stock portfolio is well diversified,then the portfolio variance

Which one of the following statements is correct concerning the standard deviation of a portfolio?

Which one of these measures the squared deviations of actual returns from expected returns?

When computing the expected return on a portfolio of stocks the portfolio weights are based on the

You plotted the monthly rate of return for two securities against time for the past 48 months.If the pattern of the movements of these two sets of returns rose and fell together the majority,but not all,of the time,then the securities have

Which one of these measures the interrelationship between two securities?

Assume two securities are negatively correlated.If these two securities are combined into an equally weighted portfolio,the portfolio standard deviation must be

For an individual investor,the ideal portfolio could best be described as the portfolio that

The standard deviation of a portfolio will tend to increase when

If there is no diversification benefit derived from combining two risky stocks into one portfolio,then the

Which statement correctly applies to the feasible set of returns for a portfolio consisting of domestic stocks,A and B? Assume that the expected returns are plotted against standard deviations.

The expected return on a portfolio

Which one of these statements is correct regarding a portfolio of two risky securities?

The covariance of two securities is

The correlation between stocks A and B is equal to the