Question 1

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________.

Accepted Answer

A)   equal to the sum of the securities' standard deviations
B)   equal to -1
C)   equal to 0
D)   greater than 0E) None of the above
F) C) and D)

Question 2

An investor's degree of risk aversion will determine his or her ________.

Accepted Answer

A)   optimal risky portfolio
B)   risk-free rate
C)   optimal mix of the risk-free asset and risky asset
D)   capital allocation lineE) B) and C)
F) A) and D)

Question 3

A measure of the riskiness of an asset held in isolation is ________.

Accepted Answer

A)   beta
B)   standard deviation
C)   covariance
D)   alphaE) A) and B)
F) B) and D)

Question 4

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ________ and to the ________.

Accepted Answer

A)   up; right
B)   up; left
C)   down; right
D)   down; leftE) None of the above
F) A) and C)

Question 5

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is ________.

Accepted Answer

A)   0%
B)   40%
C)   60%
D)   100%E) C) and D)
F) None of the above

Question 6

Diversification is most effective when security returns are ________.

Accepted Answer

A)   high
B)   negatively correlated
C)   positively correlated
D)   uncorrelatedE) C) and D)
F) A) and D)

Question 7

Risk that can be eliminated through diversification is called ________ risk.

Accepted Answer

A)   unique
B)   firm-specific
C)   diversifiable
D)   all of these optionsE) None of the above
F) B) and D)

Question 8

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 4%. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is ________.

Accepted Answer

A)   -.0447
B)   -.0020
C)   .0020
D)   .0447E) All of the above
F) C) and D)

Question 9

The correlation coefficient between two assets equals ________.

Accepted Answer

A)   their covariance divided by the product of their variances
B)   the product of their variances divided by their covariance
C)   the sum of their expected returns divided by their covariance
D)   their covariance divided by the product of their standard deviationsE) A) and D)
F) A) and C)

Exam 6: Efficient Diversification

The correlation coefficient between two assets equals ________.

Correct Answer
verified

A measure of the riskiness of an asset held in isolation is ________.

Correct Answer
verified

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier and to the .

Correct Answer
verified

Risk that can be eliminated through diversification is called ________ risk.

Correct Answer
verified

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________.

Correct Answer
verified

Diversification is most effective when security returns are ________.

Correct Answer
verified

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 4%. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is ________.

Correct Answer
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Correct Answer
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An investor's degree of risk aversion will determine his or her ________.

Correct Answer
verified

Exam 6: Efficient Diversification

The correlation coefficient between two assets equals ________.

Correct AnswerverifiedShow Answer

A measure of the riskiness of an asset held in isolation is ________.

Correct AnswerverifiedShow Answer

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ________ and to the ________.

Correct AnswerverifiedShow Answer

Risk that can be eliminated through diversification is called ________ risk.

Correct AnswerverifiedShow Answer

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ________.

Correct AnswerverifiedShow Answer

Diversification is most effective when security returns are ________.

Correct AnswerverifiedShow Answer

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 4%. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An investor's degree of risk aversion will determine his or her ________.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier and to the .

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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