Ch.7 Quiz

Instructions
Please read the questions carefully.

This assessment is worth 100 points.

  1. Risk that can be eliminated through diversification is called ______ risk.    (4 points)

    a.  
    b.  
    c.  
    d.  

  2. The _________ could be used in an index model to represent common or systematic risk factors.    (4 points)

    a.  
    b.  
    c.  
    d.  

  3. 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?    (4 points)

    a.  
    b.  
    c.  
    d.  

  4. Diversification is most effective when security returns are __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  5. __________ is a true statement regarding the variance of risky portfolios.    (4 points)

    a.  
    b.  
    c.  
    d.  

  6. Market risk is also called __________ and __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  7. Firm specific risk is also called __________ and ___________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  8. Portfolios that lie on the portion of the efficient frontier below the minimum-variance portfolio ___________________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  9. The slope of a capital allocation line measures the reward-to-variability ratio of ___________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  10. The term "complete portfolio" refers to a portfolio consisting of __________________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  11. The optimal risky portfolio can be identified by finding _____________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  12. Reward-to-variability ratios are ________ on the capital market line than (as) on the efficient frontier.    (4 points)

    a.  
    b.  
    c.  
    d.  

  13. 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 10% and a standard deviation of return of 30%. The weight of security B in the global minimum variance is __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  14. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is__________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  15. Use the following to answer questions 34-36:

    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 12% 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 B is __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  16. The expected return on the optimal risky portfolio is __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  17. The reward-to-variability ratio is computed as __________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  18. Which of the following portfolios cannot lie on the efficient frontier?

    Portfolio
    Expected Return
    Standard Deviation
    I
    8%
    10%
    J
    16%
    20%
    K
    15%
    25%
    L
    25%
    38%
       (4 points)

    a.  
    b.  
    c.  
    d.  

  19. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and ___________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  20. The variability of the rate of return on a security depends on ______________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  21. The values of beta coefficients of securities are ___________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  22. Used appropriately, diversification can reduce or eliminate __________ risk.    (4 points)

    a.  
    b.  
    c.  
    d.  

  23. In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of _________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  24. Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is ______________.    (4 points)

    a.  
    b.  
    c.  
    d.  

  25. In risk-return space, the market portfolio is found at ____________.    (4 points)

    a.  
    b.  
    c.  
    d.  



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