Portfolio Management and Investment Risk
1. Which one of the following returns is the average return you expect to earn in the future on a risky asset?
Expected return
2. What is the extra compensation paid to an investor who invests in a risky asset rather than in a riskfree asset called?
Risk premium
3. A group of stocks and bonds held by an investor is called which one of the following?Portfolio
4. The value of an individual security divided by the portfolio value is referred to as the portfolio:Weight
5. Diversification is investing in a variety of assets with which one of the following as the primary goal
? reducing some risks
6. Correlation is the:Extent to which the returns on two assets move together
7. The division of a portfolio’s dollars among various types of assets is referred to as:
Asset allocation
8. Which one of the following is a collection of possible risk–
Return combinations available from portfolios consisting of individual assets?
Investment opportunity set
9. An efficient portfolio is a portfolio that does which one of the following?
Offers the highest return for a given level of risk
10. Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?
Markowitz efficient frontier
11. . Which of the following are affected by the probability of a state of the economy occurring? I.
expected return of an individual security II.
expected return of a portfolio III. Standard deviation of an individual security IV. Standard deviation of a portfolio I, II, III, and IV
12. Which one of the following statements must be true?
Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment.
13. You own a portfolio of 5 stocks and have 3 expected states of the economy. You have twice as much invested in Stock A as you do in Stock E. How will the weights be determined when you compute the rate of return for each economic state?
The weights will be based on the amount invested in each stock as a percentage of the total amount invested
14. Terry has a portfolio comprised of two individual securities. Which one of the following computations that he might do is NOT a weighted average?
Correlation between the securities
15. You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy. If the probability of a booming economy decreases, your expected return will:
Decrease
16. You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct?
Security B has a risk premium that is 50 percent greater than Security A’s risk premium
17. Which of the following will increase the expected risk premium for a security, all else constant? I. An increase in the security’s expected return II. A decrease in the security’s expected return III. An increase in the risk-free rate IV. A decrease in the risk-free rate I and IV only
18. f the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:
Zero
19. You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?
Variance of the returns given the multiple states of the economy
20
Which of the following affect the expected rate of return for a portfolio? I.
weight of each security held in the portfolio II. The probability of various economic states occurring III. The variance of each individual security IV. The expected rate of return of each security given each economic state .
I, II, and IV only
21. You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5 percent, regardless of the economic state. Given this, what must be value of the portfolio’s variance be?
0.0
22. As the number of individual stocks in a portfolio increases, the portfolio standard deviation:
Decreases at a diminishing rate
23. Which one of the following is eliminated, or at least greatly reduced, by increasing the number of individual securities held in a portfolio?
diversifiable risk
24. Non-diversifiable risk:
Remains constant regardless of the number of securities held in a portfolio
25. Which one of the following correlation coefficients can provide the greatest diversification benefit?-1.0
26. To reduce risk as much as possible, you should combine assets which have which one of the following correlation relationships?
Strongly negative
27. What is the correlation coefficient of two assets that are uncorrelated? 0
28. How will the returns on two assets react if those returns have a perfect positive correlation? I. Move in the same direction II. Move in opposite directions III. Move by the same amount IV. Move by either equal or unequal amounts I and IV only
29. If two assets have a zero correlation, their returns will move randomly and independently of each other
30. Which one of the following correlation relationships has the potential to completely eliminate risk?
Perfectly negative
31. Assume the returns on Stock X were positive in January, February, April, July, and November. The other months the returns on Stock X were negative. The returns on Stock Y were positive in January, April, May, July, August, and October and negative the remaining months. Which one of the following correlation coefficients best describes the relationship between Stock X and Stock Y?
0.0
32. Which one of the following statements is correct?
A portfolio variance is dependent upon the portfolio’s asset allocation
33. A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio?
30 percent stocks and 70 percent bonds
34. Which one of the following statements is correct concerning asset allocation?
There is an ideal asset allocation between stocks and bonds given a specified level of risk
35. You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds. Which one of the following must be true if you change the asset allocation?
The two portfolios could have significantly different standard deviations
36. Which one of the following distinguishes a minimum variance portfolio?
Lowest risk portfolio of any possible portfolio given the same securities but in differing proportions
37. Where does the minimum variance portfolio lie in respect to the investment opportunity set?
Most leftward point
38. Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero?
-1.0
39. Which one of the following statements about efficient portfolios is correct?
There are multiple efficient portfolios that can be constructed using the same two securities
40. 0. You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph?
Some portfolios will be efficient while others will not
41. You are graphing the investment opportunity set for a portfolio of two securities with the expected return on the vertical axis and the standard deviation on the horizontal axis. If the correlation coefficient of the two securities is +1, the opportunity set will appear as which one of the following shapes?
Linear with an upward slope
42. A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities.
The lowest risk for any given rate of return
43. You combine a set of assets using different weights such that you produce the following. Which one of these portfolios CANNOT be a Markowitz efficient portfolio? .
E
44. What is the expected return on this stock given the following information?-8.70 percent
45. What is the expected return on this stock given the following information?-2.05 percent
46. What is the expected return on this stock given the following information?10.70 percent
47. An investor owns a security that is expected to return 14 percent in a booming economy and 6 percent in a normal economy. The overall expected return on the security is 8.88 percent. Given there are only two states of the economy, what is the probability that the economy will boom?
36 percent
48. Rosita owns a stock with an overall expected return of 14.40 percent. The economy is expected to either boom or be normal. There is a 48 percent chance the economy will boom. If the economy booms, this stock is expected to return 15 percent. What is the expected return on the stock if the economy is normal?
13.85 percent
49. What is the expected return on this stock given the following information?6.40 percent
50. The risk-free rate is 4.35 percent. What is the expected risk premium on this security given the. Following information?
7.65 percent
51. The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the following information?
5.95 percent
52. The risk-free rate is 3.15 percent. What is the expected risk premium on this stock given the following information?
11.21 percent
53. There is a 30 percent probability that a particular stock will earn a 17 percent return and a 70 percent probability that it will earn 11 percent. What is the risk-free rate if the risk premium on the stock is 8.60 percent?
4.20 percent
54. Tall Stand Timber stock has an expected return of 17.3 percent. What is the risk-free rate if the risk premium on the stock is 12.4 percent?
4.90 percent
55. What is the variance of the expected returns on this stock? 3.84
56. What is the variance of the expected returns on this stock? 29.00
57. What is the variance of the returns on a security given the following information? 347.15
58. What is the variance of the returns on a security given the following information? 77.31
59. What is the standard deviation of the returns on this stock?5.77 percent
60. What is the standard deviation of the returns on this stock?17.59 percent
61. What is the standard deviation of a security which has the following expected returns?7.61 percent
62. A portfolio consists of the following securities. What is the portfolio weight of stock B?.429
63. A portfolio consists of the following securities. What is the portfolio weight of stock X?.202
64. Travis has a portfolio consisting of two stocks, A and B, which is valued at $42,900. Stock A is worth $23,900. What is the portfolio weight of stock B?
.443
65. Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $89,100. Stock X is worth $57,800. What is the portfolio weight of stock Y?
.351
66. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the expected rate of return on this portfolio?
11.76 percent
67. You have a portfolio which is comprised of 65 percent of stock A and 35 percent of stock B. What is the expected rate of return on this portfolio?
5.45 percent
68. You have a portfolio which is comprised of 55 percent of stock A and 45 percent of stock B. What is the expected rate of return on this portfolio?
9.46 percent
69. You have a portfolio which is comprised of 75 percent of stock A and 25 percent of stock B. What is the expected rate of return on this portfolio?
11.13 percent
70. You have a portfolio which is comprised of 72 percent of stock A and 28 percent of stock B. What is the variance of this portfolio?
290.9
71. You have a portfolio which is comprised of 44 percent of stock A and 56 percent of stock B. What is the variance of this portfolio?
70.15
72. You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is the standard deviation of this portfolio?
6.17 percent
73. Roger has a portfolio comprised of $8,000 of stock A and $12,000 of stock B. What is the standard deviation of this portfolio?
9.97 percent
74. You have a portfolio which is comprised of 20 percent of stock A and 80 percent of stock B. What is the portfolio standard deviation?
4.00 percent
75. You have a portfolio which is comprised of 48 percent of stock A and 52 percent of stock B. What is the standard deviation of this portfolio?
2.06 percent
76. Stock A has a standard deviation of 12 percent per year and stock B has a standard deviation of 16 percent per year. The correlation between stock A and stock B is .37. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 35 percent. What is your portfolio variance?
.01245
77. Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance?
.02022
78. Stock A has a standard deviation of 15 percent per year and stock B has a standard deviation of 21 percent per year. The correlation between stock A and stock B is .32. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 60 percent. What is your portfolio standard deviation?
15.59 percent
79. Stock X has a standard deviation of 21 percent per year and stock Y has a standard deviation of 6 percent per year. The correlation between stock A and stock B is .38. You have a portfolio of these two stocks wherein stock X has a portfolio weight of 42 percent. What is your portfolio standard deviation?
10.64 percent
80. A stock fund has a standard deviation of 18 percent and a bond fund has a standard deviation of 11 percent. The correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum variance portfolio?
21 percent
81. A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent. The correlation of the two funds is .11. What is the weight of the stock fund in the minimum variance portfolio?