Question 1

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:
A) $21,000
B) $20,000
C) $20,700
D) $21,500

Accepted Answer

C)
 11ea7e5a_6e61_f071_9a0a_ff31d52aed26_TB1623_00 Value of portfolio = 20,000(1 + .035) = 20,700

Question 2

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight of Ball Corporation in your portfolio after one year is closest to:
A) 20.0%
B) 12.5%
C) 20.7%
D) 21.7%

Accepted Answer

D)
 11ea7e5a_6e62_1782_9a0a_c952f978b453_TB1623_00 Value of portfolio = 20,000(1 + .035) = 20,700
Value of BLL = $4,000(1 + .125) = $4,500
Weight for BLL = 4,500 / 20,700 = 0.217391

Question 3

Which of the following statements is false?
A) Stock returns will tend to move together if they are affected similarly by economic events.
B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries.
C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together.
D) With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be.

Accepted Answer

C) Almost all of the correlations between stocks are positive, illustrating the general tendency of stocks to move together.

Question 4

Which of the following statements is false?
A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.
B) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio.
C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio.
D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

Accepted Answer

A) Without trading, the portfolio weights will increase for the stocks in the portfolio whose returns are above the overall portfolio return.

Question 5

Which of the following statements is false?
A) The covariance and correlation allow us to measure the co-movement of returns.
B) Correlation is the expected product of the deviations of two returns from their means.
C) Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio.
D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

Accepted Answer

B) Covariance is the expected product of the deviations of two returns from their means.

Question 6

Which of the following equations is incorrect? A) x_i = B) R_p = Σ_i x_iR_i C) R_p = x₁R₁ + x₂R₂ + ... + x_nR_n D) E[R_p] = E[Σ_i x_iR_i]

Accepted Answer

A) x_i = 11ea7e5a_6e61_542f_9a0a_6d881dbda0fe_TB1623_11

Question 7

Which of the following statements is false?
A) While the sign of the correlation is easy to interpret, its magnitude is not.
B) Independent risks are uncorrelated.
C) When the covariance equals 0, the returns are uncorrelated.
D) To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocks' returns move together.

Accepted Answer

A) While the sign of the covariance is easy to interpret, its magnitude is not.

Question 8

A portfolio weight is ________ of individual investment in the total investment portfolio.
A) a percentage
B) a weighted average
C) a simple average
D) a geometric average

Accepted Answer

A portfolio weight is calculated as a percentage of an individual investment's value in the total portfolio. For example, if an investment is worth $10,000 in a portfolio that has a total value of $100,000, then the portfolio weight of that investment is 10% ($10,000 divided by $100,000).

Question 9

By combining stocks into a portfolio,we reduce risk through
A) higher expected return.
B) higher rate of return.
C) higher average return.
D) diversification.

Accepted Answer

By diversifying our portfolio, we invest in multiple stocks from different industries and sectors, reducing the risk of any one stock negatively impacting our overall returns. This reduces our portfolio's volatility and can potentially increase our long-term returns. Therefore, diversification is the best answer for reducing risk in a portfolio.

Question 10

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight of Abbott Labs in your portfolio after one year is closest to:
A) -10.0%
B) 43.5%
C) 45.0%
D) 50.0%

Accepted Answer

B)
 11ea7e5a_6e62_3e93_9a0a_d7777b95eb29_TB1623_00 Value of portfolio = 20,000(1 + .035) = 20,700
Value of ABT = $10,000(1 + -.10) = $9,000
Weight for ABT = 9,000 / 20,700 = 0.434783

Question 11

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight of Lowes in your portfolio after one year is closest to:
A) 20.0%
B) 34.8%
C) 30.0%
D) 36.0%

Accepted Answer

B)
 11ea7e5a_6e62_8cb4_9a0a_e10e58f06ebb_TB1623_00 Value of portfolio = 20,000(1 + .035) = 20,700
Value of LOW = $6,000(1 + .20) = $7,200
Weight for LOW = 7,200 / 20,700 = 0.347826

Question 12

Use the information for the question(s) below.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share.
-The weight on Abbott Labs in your portfolio is:
A) 50%
B) 40%
C) 30%
D) 20%

Accepted Answer

A) Value of portfolio = 200 × $50 + 200 × $30 + 100 × $40 = $20,000 x_i = value of security / value of portfolio = (200 × $50) / $20,000 = .50 or 50%

Question 13

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You expect a return of 16% for Merck and 12% for Home Depot.What is the expected return on your portfolio?
A) 13.50%
B) 14.00%
C) 13.75%
D) 14.50%

Accepted Answer

A) = (15,000 / 40,000)(.16) + (25,000 / 40,000)(.12) = .135

Question 14

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You receive an actual return of -8% for Merck and 12% for Home Depot.What is the actual return on your portfolio?
A) 4.50%
B) 4.00%
C) 10.00%
D) 2.00%

Accepted Answer

A) = (15,000 / 40,000)(-0.08) + (25,000 / 40,000)(.12) = .045

Question 15

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The return on your portfolio over the year is:
A) 0%
B) 7.5%
C) 3.5%
D) 5.0%

Accepted Answer

C)
 11ea7e5a_6e61_c960_9a0a_85a4ced081e6_TB1623_00

Question 16

The amount of risk that will remain in a portfolio depends on the degree to which the stocks are exposed to
A) independent risks.
B) diversifiable risks.
C) common risks.
D) idiosyncratic risks.

Accepted Answer

The amount of risk that remains in a portfolio is primarily due to common risks, also known as systematic or market risks, which affect the entire market and cannot be eliminated through diversification.

Question 17

Use the information for the question(s) below.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share.
-The weight on Ball Corporation in your portfolio is:
A) 50%
B) 40%
C) 20%
D) 30%

Accepted Answer

C) Value of portfolio = 200 × $50 + 200 × $30 + 100 × $40 = $20,000 x_i = value of security / value of portfolio = (100 × $40) / $20,000 = .20 or 20%

Question 18

Which of the following statements is false?
A) Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1.
B) Volatility is the square root of variance.
C) The closer the correlation is to 0, the more the returns tend to move together as a result of common risk.
D) If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive.

Accepted Answer

C) The closer the correlation is to 1, the more the returns tend to move together as a result of common risk.

Question 19

Use the information for the question(s) below.
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share.
-The weight on Lowes in your portfolio is:
A) 40%
B) 20%
C) 50%
D) 30%

Accepted Answer

D) Value of portfolio = 200 × $50 + 200 × $30 + 100 × $40 = $20,000 x_i = value of security / value of portfolio = (200 × $30) / $20,000 = .30 or 30%

Question 20

The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face ________ risks and their prices move together.
A) common
B) independent
C) firm-specific
D) unique

Accepted Answer

Common risks are risks that affect multiple stocks in a portfolio, such as economic factors, political events or market trends. By holding a diversified portfolio with stocks that have common risks, the portfolio can eliminate some of the risks as these factors will affect stocks differently, thereby reducing the overall portfolio risk. In contrast, firm-specific risks, unique or independent risks are associated with particular stocks and cannot be diversified away by holding a portfolio of stocks.

Quiz 11: Optimal Portfolio Choice and the Capital Asset Pricing Model

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight of Ball Corporation in your portfolio after one year is closest to:

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Which of the following equations is incorrect?

Which of the following statements is false?

A portfolio weight is ________ of individual investment in the total investment portfolio.

By combining stocks into a portfolio,we reduce risk through

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight of Abbott Labs in your portfolio after one year is closest to:

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The weight of Lowes in your portfolio after one year is closest to:

Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. -The weight on Abbott Labs in your portfolio is:

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You expect a return of 16% for Merck and 12% for Home Depot.What is the expected return on your portfolio?

Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock.You receive an actual return of -8% for Merck and 12% for Home Depot.What is the actual return on your portfolio?

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The return on your portfolio over the year is:

The amount of risk that will remain in a portfolio depends on the degree to which the stocks are exposed to

Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. -The weight on Ball Corporation in your portfolio is:

Which of the following statements is false?

Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. -The weight on Lowes in your portfolio is:

The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face ________ risks and their prices move together.