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Exam 6: Efficient Diversification

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Question 21

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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

E) B) and C)
F) A) and D)

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Question 22

Multiple Choice

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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 0.45. 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) 23.00%
B) 19.76%
C) 18.45%
D) 17.67%

E) A) and B)
F) A) and C)

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Question 23

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On a standard expected return vs.standard deviation graph investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. -The standard deviation of the returns on the optimal risky portfolio is _________.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is 0.4. The risk-free rate of return is 5%. -The expected return on the optimal risky portfolio is _________.

Asset A has an expected return of 20% and a standard deviation of 25%.The risk free rate is 10%.What is the reward-to-variability ratio?

This stock has greater systematic risk than a stock with a beta of ___.

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 0.50. The risk-free rate of return is 10%. -The proportion of the optimal risky portfolio that should be invested in stock A is _________.

Which one of the following stock return statistics fluctuates the most over time?

The values of beta coefficients of securities are __________.

In order to construct a riskless portfolio using two risky stocks,one would need to find two stocks with a correlation coefficient of ________.

If an investor does not diversify their portfolio and instead puts all of their money in one stock,the appropriate measure of security risk for that investor is the ________.

The characteristic line for this stock is Rstock = ___ + ___ Rmarket.

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 ______________.

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 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

What is the standard deviation of a portfolio of two stocks given the following data? Stock A has a standard deviation of 18%.Stock B has a standard deviation of 14%.The portfolio contains 40% of stock A and the correlation coefficient between the two stocks is -.23.

A portfolio is composed of two stocks,A and B. Stock A has a standard deviation of return of 24% while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.

The expected return of portfolio is 8.9% and the risk free rate is 3.5%.If the portfolio standard deviation is 12.0%,what is the reward to variability ratio of the portfolio?

The expected rate of return of a portfolio of risky securities is _________.

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.