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| 1 | |
Which one of the following stocks is relatively more risky when held in a well-diversified portfolio?
Stock | Standard Deviation | Beta | ABC | 30% | 1.2 | XYZ | 40% | 1.6 |
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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 | |
Compute the expected rate of return for the following three-stock portfolio:
Stock | Expected Return | Standard Deviation | Weight | A | 10% | 20% | 0.2 | B | 12% | 28% | 0.3 | C | 18% | 40% | 0.5 |
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| | A) | 12.6% |
| | B) | 14.6% |
| | C) | 29.3% |
| | D) | 32.4% |
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| 3 | |
Suppose that two risky portfolios, Portfolio A and Portfolio B, are perfectly negatively correlated. Portfolio A has an expected rate of return of 10% and a standard deviation of the rate of return of 20%. Portfolio B has an expected rate of return of 12% and a standard deviation of the rate of return of 30%. Portfolio A and Portfolio B are combined in such a way that the combination has a standard deviation of zero. What is the weight of portfolio A? |
| | A) | 10% |
| | B) | 20% |
| | C) | 40% |
| | D) | 60% |
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| 4 | |
Portfolio diversification benefits ______________. |
| | A) | exist only when security returns are negatively correlated |
| | B) | are always available, regardless of securities' correlation coefficients |
| | C) | exist whenever security returns are less than perfectly positively correlated |
| | D) | are greater for positively correlated security returns than for negatively correlated security returns |
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| 5 | |
The complete portfolio is ____________. |
| | A) | also called the optimal risky portfolio |
| | B) | a combination of the risk-free asset and the minimum variance portfolio, and theoretically is the same portfolio for all investors |
| | C) | a combination of the risk-free asset and the optimal risky portfolio, and theoretically is the same portfolio for all investors |
| | D) | a combination of the risk-free asset and the optimal risky portfolio, and is dependent on each investor's risk aversion |
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| 6 | |
A portfolio is composed of two stocks, A and B. For Stock A, the standard deviation of the rate of return is 20%. For Stock B, the standard deviation of the rate of return is 30%. Stock A comprises 40% of the portfolio while Stock B comprises 60% of the portfolio. What is the standard deviation of return for the portfolio if the correlation coefficient between the returns for A and B is 0.5? |
| | A) | 5.3% |
| | B) | 23.1% |
| | C) | 27.4% |
| | D) | 45.4% |
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| 7 | |
A portfolio is composed of two stocks, A and B. Stock A has an expected return of 10% while Stock B has an expected rate of return of 18%. What is the proportion of Stock A in a portfolio combining Stock A and Stock B such that the expected rate of return of the portfolio is 16.4%? |
| | A) | 0.2 |
| | B) | 0.4 |
| | C) | 0.6 |
| | D) | 0.8 |
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| 8 | |
Which of the following portfolios cannot lie on the efficient frontier?
Portfolio | Expected Return | Standard Deviation | X | 10% | 15% | Y | 10% | 25% | Z | 15% | 25% |
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| | A) | Portfolio Y |
| | B) | Portfolio Z |
| | C) | Portfolio Y and Portfolio Z |
| | D) | Portfolio X and Portfolio Y |
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| 9 | |
The standard deviation of the rate of return for Stock A is 25% and the standard deviation of the rate of return for Stock B is 30%. The covariance of the returns on Stock A and Stock B is 0.06. What is the correlation coefficient between the returns on Stock A and Stock B? |
| | A) | 0.2 |
| | B) | 0.3 |
| | C) | 0.7 |
| | D) | 0.8 |
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| 10 | |
The correlation between Stock X and the market portfolio is 0.80, the standard deviation of returns for the market portfolio is 20%, and the standard deviation of returns for Stock X is 30%. What is the beta for Stock X? |
| | A) | 0.83 |
| | B) | 1.00 |
| | C) | 1.20 |
| | D) | 1.33 |
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| 11 | |
Jensen Corp. has an expected excess return of 3% for the coming year. The company's beta is 0.8 and the expected market rate of return is 10%. Suppose that the actual market rate of return is 13%. Based on this information, what is your revised expectation for Jensen's excess return? |
| | A) | 5.4% |
| | B) | 6.0% |
| | C) | 12.4% |
| | D) | 15.4% |
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| 12 | |
The optimal risky portfolio formed by combining a risky portfolio and a risk-free asset is the portfolio that has the ______________. |
| | A) | highest reward-to-volatility ratio |
| | B) | highest slope of the efficient frontier |
| | C) | highest slope of the characteristic line |
| | D) | highest excess return |
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| 13 | |
The slope of the security characteristic line ____________. |
| | A) | measures the average response of an individual security's return to changes in the market return |
| | B) | can not be negative |
| | C) | is a measure of the security's firm-specific risk |
| | D) | all of the above are correct statements about the slope of the security characteristic line |
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| 14 | |
The investment opportunity set is ______________. |
| | A) | equivalent to the efficient frontier |
| | B) | the set of all available portfolio risk-return combinations |
| | C) | the set of portfolios that minimize risk for a given expected rate of return |
| | D) | all of the above describe the investment opportunity set |
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| 15 | |
The risk that can be eliminated by diversification is called _______risk, while the risk that remains even after diversification is called _________risk. |
| | A) | A) nonsystematic; market |
| | B) | B) nonsystematic; unique |
| | C) | C) systematic; market |
| | D) | D) firm-specific; nonsystematic |
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