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| 1.
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Which one of the following stocks is relatively more risky when held in a well-diversified portfolio?
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| | A) | XYZ because its beta is higher. |
| | B) | XYZ because its standard deviation is higher. |
| | C) | ABC because its beta is lower. |
| | D) | ABC because its standard deviation is lower. |
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| 2.
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Compute the expected return for a three-stock portfolio with the following:
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| | A) | 13.3% |
| | B) | 14.6% |
| | C) | 29.3% |
| | D) | 32.4% |
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| 3.
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A portfolio is considered to be efficient if ______________. |
| | A) | there is no other portfolio with a higher expected return |
| | B) | there is no other portfolio with a lower risk |
| | C) | there is no other portfolio offers a higher expected return with a higher risk |
| | D) | there is no other portfolio offers a lower risk with the same expected return |
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| 4.
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Which of the following is(are) most correct concerning a two-stock portfolio? |
| | A) | The portfolio should have no company specific risk. |
| | B) | Portfolio standard deviation can never be a weighted average of the two stocks' standard deviations. |
| | C) | Portfolio return is a weighted average of the two stocks' returns. |
| | D) | All of the above are correct. |
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| 5.
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The maximum benefit of diversification can be achieved by combining securities in a portfolio where the correlation coefficient between the securities is ______________. |
| | A) | between 0 and -1 |
| | B) | 0 |
| | C) | -1 |
| | D) | +1 |
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| 6.
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A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 20% while stock B has a standard deviation of return of 30%. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. What is the standard deviation of return on the portfolio if the correlation coefficient between the returns on A and B is 0.5? |
| | A) | 23.1% |
| | B) | 25% |
| | C) | 26% |
| | D) | 24.7% |
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| 7.
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A portfolio is composed of two stocks, A and B. Stock A has an expected return of 10% while stock B has an expected return of 18%. What is the proportion of stock A in the portfolio so that the expected return of the portfolio is 16.4%? |
| | A) | 0.2 |
| | B) | 0.8 |
| | C) | 0.4 |
| | D) | 0.6 |
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| 8.
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Which of the following portfolios cannot lie on the efficient frontier?
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| | A) | Portfolio X |
| | B) | Portfolio Y |
| | C) | Portfolio Z |
| | D) | All portfolios should lie on the efficient frontier. |
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| 9.
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The standard deviation of return on stock A is 0.25 while the standard deviation of return on stock B is 0.30. If the covariance of returns on A and B is 0.06, the correlation coefficient between the returns on A and B is ______________. |
| | A) | 0.2 |
| | B) | 0.6 |
| | C) | 0.7 |
| | D) | 0.8 |
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| 10.
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Careful selection of different stocks from different industries can eliminate the ______________ risk of a portfolio. |
| | A) | nonsystematic |
| | B) | market |
| | C) | total |
| | D) | All of the above. |
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| 11.
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A positive covariance between two stocks' returns indicates that the two stocks' returns ______________. |
| | A) | move in opposite direction |
| | B) | move in the same direction |
| | C) | have the same risk |
| | D) | have no relationship |
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| 12.
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The optimal risk portfolio formed between risky assets and a risk free asset is the portfolio that has the ______________. |
| | A) | highest reward-to-variability ratio |
| | B) | lowest reward-to-variability ratio |
| | C) | highest expected return |
| | D) | lowest risk level |
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| 13.
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The ______________ of a stock's characteristic line is the stock's beta. |
| | A) | intercept |
| | B) | rise |
| | C) | run |
| | D) | slope |
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| 14.
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The efficient frontier of many risky assets is the ______________ portion of the opportunity set. |
| | A) | upper |
| | B) | western |
| | C) | northwestern |
| | D) | southeastern |
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| 15.
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What happens typically to the portfolio's risk when more stocks are added to a 5-stock portfolio? |
| | A) | The portfolio's market risk would decrease. |
| | B) | The portfolio's total risk would decline. |
| | C) | The portfolio's unsystematic would decrease. |
| | D) | Both B and C above are correct. |
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