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#### Finance

**Q:**Which of the following statistics cannot be negative? A. covariance B. variance C. E(r) D. correlation coefficient

**Q:**The ________ is equal to the square root of the systematic variance divided by the total variance. A. covariance B. correlation coefficient C. standard deviation D. reward-to-variability ratio

**Q:**An investor's degree of risk aversion will determine his or her ______. A. optimal risky portfolio B. risk-free rate C. optimal mix of the risk-free asset and risky asset D. capital allocation line

**Q:**Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______. A. up; right B. up; left C. down; right D. down; left

**Q:**Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______. A. asset A B. asset B C. no risky asset D. The answer cannot be determined from the data given.

**Q:**Based on the outcomes in the following table, choose which of the statements below is (are) correct?I. The covariance of security A and security B is zero.II. The correlation coefficient between securities A and C is negative.III. The correlation coefficient between securities B and C is positive.A. I onlyB. I and II onlyC. II and III onlyD. I, II, and III

**Q:**Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________. A. they had to pay huge fines for obstruction of justice B. their 401k accounts were held outside the company C. their 401k accounts were not well diversified D. none of these options

**Q:**The _______ decision should take precedence over the _____ decision. A. asset allocation; stock selection B. bond selection; mutual fund selection C. stock selection; asset allocation D. stock selection; mutual fund selection

**Q:**Risk that can be eliminated through diversification is called ______ risk. A. unique B. firm-specific C. diversifiable D. all of these options

**Q:**The plot of a security's excess return relative to the market's excess return is called the _______. A. efficient frontier B.security characteristic line C. capital allocation line D. capital market line

**Q:**Lear Corp. has an expected excessreturn of 8% next year. Assume Lear's beta is 1.43. If the economy booms and the stock market beats expectations by 5%, what was Lear's actual excess return? A. 7.15% B. 13% C. 15.15% D. 18.59 %

**Q:**The portfolio with the lowest standard deviation for any risk premium is called the_______. A. CAL portfolio B. efficient frontier portfolio C. global minimum variance portfolio D. optimal risky portfolio

**Q:**The efficient frontier represents a set of portfolios that A. maximize expected return for a given level of risk. B. minimize expected return for a given level of risk. C. maximize risk for a given level of return. D. None of the options.

**Q:**In the article "Danger: High Levels of Company Stock," what is the maximum amount of your employer's stock that the author recommends you hold in your retirement account? A. 5% B. 10% C. 50% D. 90%

**Q:**The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?A. Stock A is riskier.B. Stock B is riskier.C. Both stocks are equally risky.D. The answer cannot be determined from the information given.

**Q:**A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project? A. 0% B. 25% C. 50% D. 75%

**Q:**A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 62% D. 73%

**Q:**The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?A. 0B. .45C. .74D. 1.35

**Q:**What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.A. 0%B. 10.8%C. 18%D. 24%

**Q:**Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive? A. Ïƒ2rp < (W12Ïƒ12 + W22Ïƒ22) B. Ïƒ2rp = (W12Ïƒ12 + W22Ïƒ22) C. Ïƒ2rp = (W12Ïƒ12 - W22Ïƒ22) D. Ïƒ2rp > (W12Ïƒ12 + W22Ïƒ22)

**Q:**You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio A. I only B. I and II only C. I and III only D. I, II, and III

**Q:**As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall. A. I only B. I and II only C. III only D. I, II, and III

**Q:**A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________. A. firm-specific risk B. systematic risk C. unique risk D. none of the options

**Q:**Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk? A. market risk B. unique risk C. unsystematic risk D. none of these options (With a correlation of 1, no risk will be reduced.)

**Q:**Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk? A. market risk B. nondiversifiable risk C. systematic risk D. unique risk

**Q:**What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500? A. -1 B. 0 C. 1 D. .5

**Q:**Which of the following correlation coefficients will produce the most diversification benefits? A. -.6 B. -.9 C. 0 D. .4

**Q:**Which of the following correlation coefficients will produce the least diversification benefit? A. -.6 B. -.3 C. 0 D. .8

**Q:**If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______. A. calculate two covariances and one trivariance B. calculate only two covariances C. calculate three covariances D. average the variances of the individual stocks

**Q:**Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________. A. increase the systematic risk of the portfolio B. increase the unsystematic risk of the portfolio C. increase the return of the portfolio D. decrease the variation in returns the investor faces in any one year

**Q:**The stock is ______ riskier than the typical stock.A. 32%B. 15.44%C. 12%D. 38%

**Q:**_______________ % of the variance is explained by this regression.A. 12B. 35C. 4.05D. 80

**Q:**The characteristic line for this stock is Rstock = ___ + ___ Rmarket.A. .35; .12B. 4.05; 1.32C. 15.44; .97D. 26; 1.36

**Q:**This stock has greater systematic risk than a stock with a beta of ___.A. .50B. 1.5C. 2D. 3

**Q:**The beta of this stock is ____.A. .12B. .35C. 1.32D. 4.05

**Q:**You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______. A. 1.8 B. 2.48 C. 3.12 D. 5.49

**Q:**Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II, and III

**Q:**Which of the following provides the best example of a systematic-risk event? A. A strike by union workers hurts a firm's quarterly earnings. B. Mad Cow disease in Montana hurts local ranchers and buyers of beef. C. The Federal Reserve increases interest rates 50 basis points. D. A senior executive at a firm embezzles $10 million and escapes to South America.

**Q:**If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________. A. stock's standard deviation B. variance of the market C. stock's beta D. covariance with the market index

**Q:**Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. 1 B. less than 1 C. between 0 and 1 D. less than or equal to 0

**Q:**To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________. A. 1 B. .5 C. 0 D. -1

**Q:**Diversification can reduce or eliminate __________ risk. A. all B. systematic C. nonsystematic D. only an insignificant

**Q:**The market value weighted-average beta of firms included in the market index will always be _____________. A. 0 B. between 0 and 1 C. 1 D. none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

**Q:**A security's beta coefficient will be negative if ____________. A. its returns are negatively correlated with market-index returns B. its returns are positively correlated with market-index returns C. its stock price has historically been very stable D. market demand for the firm's shares is very low

**Q:**The values of beta coefficients of securities are __________. A. always positive B. always negative C. always between positive 1 and negative 1 D. usually positive but are not restricted in any particular way

**Q:**A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta? A. 1 B. .75 C. .60 D. .55

**Q:**You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________. A. covariance between ACE and the market has fallen B. correlation coefficient between ACE and the market has fallen C. correlation coefficient between ACE and the market has risen D. unsystematic risk of ACE has risen

**Q:**The term excess return refers to ______________. A. returns earned illegally by means of insider trading B. the difference between the rate of return earned and the risk-free rate C. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk D. the portion of the return on a security that represents tax liability and therefore cannot be reinvested

**Q:**You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________. A. all fall on the line of best fit; positive slope B. all fall on the line of best fit; negative slope C. are widely scattered around the line; positive slope D. are widely scattered around the line; negative slope

**Q:**According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________. A. identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs B. identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile C. identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion D. choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

**Q:**Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk A. I only B. I and II only C. I, II, and III D. I and III

**Q:**Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A. 20% more B. slightly more C. 20% less D. slightly less

**Q:**The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market A. I only B. I and II only C. II and III only D. I, II, and III

**Q:**Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return? A. 7% B. 8.5% C. 8.8% D. 9.25%

**Q:**A measure of the riskiness of an asset held in isolation is ____________. A. beta B. standard deviation C. covariance D. alpha

**Q:**An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The standard deviation of return on the minimum-variance portfolio is _________.A. 0%B. 6%C. 12%D. 17%

**Q:**Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________. A. 10% B. 20% C. 40% D. 60%

**Q:**The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________. A. -.0447 B. -.0020 C. .0020 D. .0447

**Q:**A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________. A. 23% B. 19.76% C. 18.45% D. 17.67%

**Q:**The _________ reward-to-variability ratio is found on the ________ capital market line. A. lowest; steepest B. highest; flattest C. highest; steepest D. lowest; flattest

**Q:**The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier A. I and II only B. II and III only C. III and IV only D. I and IV only

**Q:**Rational risk-averse investors will always prefer portfolios _____________. A. located on the efficient frontier to those located on the capital market line B. located on the capital market line to those located on the efficient frontier C. at or near the minimum-variance point on the efficient frontier D. that are risk-free to all other asset choices

**Q:**The term complete portfolio refers to a portfolio consisting of _________________. A. the risk-free asset combined with at least one risky asset B. the market portfolio combined with the minimum-variance portfolio C. securities from domestic markets combined with securities from foreign markets D. common stocks combined with bonds

**Q:**On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ the current investment opportunity set. A. left and above B. left and below C. right and above D. right and below

**Q:**You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.A. more than 18% but less than 24%B. equal to 18%C. more than 12% but less than 18%D. equal to 12%

**Q:**Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to vary independently of each other C. the returns on the stock and bond portfolios tend to move together D. the covariance of the stock and bond portfolios will be positive

**Q:**Harry Markowitz is best known for his Nobel Prize-winning work on _____________. A. strategies for active securities trading B. techniques used to identify efficient portfolios of risky assets C. techniques used to measure the systematic risk of securities D. techniques used in valuing securities options

**Q:**Which one of the following stock return statistics fluctuates the most over time? A. covariance of returns B. variance of returns C. average return D. correlation coefficient

**Q:**Firm-specific risk is also called __________ and __________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

**Q:**Market risk is also called __________ and _________. A. systematic risk; diversifiable risk B. systematic risk; nondiversifiable risk C. unique risk; nondiversifiable risk D. unique risk; diversifiable risk

**Q:**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 _________. A. equal to the sum of the securities' standard deviations B. equal to -1 C. equal to 0 D. greater than 0

**Q:**Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio? A. 2 B. 6 C. 8 D. 20

**Q:**The risk that can be diversified away is __________. A. beta B. firm-specific risk C. market risk D. systematic risk

**Q:**Beta is a measure of security responsiveness to _________. A. firm-specific risk B. diversifiable risk C. market risk D. unique risk

**Q:**Your great aunt Zella invested $100 in 1925 in a portfolio of large U.S. stocks that earned a compound return of 10% annually.If she left that money to you, how much would be in the account 90 years later in 2015?A. $1,000B. $9,900C. $531,302D. $5,843,325

**Q:**What is the VaR of a $10 million portfolio with normally distributed returns at the 5% VaR? Assume the expected return is 13% and the standard deviation is 20%. A. 13% B. -13% C. 19.90% D. -19.90

**Q:**Which measure of downside risk predicts the worst loss that will be suffered with a given probablility? A. standard deviation B. variance C. value at risk D. Sharpe ratio

**Q:**The normal distribution is completely described by its _______. A. mean and standard deviation B. mean and variance C. mode and standard deviation D. median and variance

**Q:**If you believe you have a 60% chance of doubling your money, a 30% chance of gaining 15%, and a 10% chance of losing your entire investment, what is your expected return? A. 5% B. 15% C. 54.5% D. 114.5%

**Q:**You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends.What is the dollar-weighted return over the entire time period?A. 2.87% B..74% C. 2.6%D. 2.21%

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