2) New investments must be considered in light of their impact on the risk and return of the
portfolio of assets because the risk of any single proposed asset investment is not independent of
other assets.
3) A financial manager’s goal for the firm is to create a portfolio that maximizes return for a
given level of risk.
5) Two assets whose returns move in the opposite directions and have a correlation coefficient of
-1 are either risk-free assets or low-risk assets.
6) The standard deviation of a portfolio is a function of the standard deviations of the individual
securities in the portfolio, the proportion of the portfolio invested in those securities, and the
correlation between the returns of those securities.
7) A(n) ________ portfolio maximizes return for a given level of risk.
A) efficient
B) risk-free
C) risk-neutral
D) risk-indifferent
8) An efficient portfolio is defined as ________.
A) grouping of assets with same level of risk
B) collection of assets with the aim of maximizing the return for a given risk level
C) an investment in a single asset
D) grouping of assets with the highest possible correlation
9) You are trying to decide which mutual fund to invest in. There are many choices, so you begin
by analyzing just two funds, the Emerging Markets Fund (EMF) and the Small Stock Fund
(SSF). Both funds have an expected return of 10%. EMF has a standard deviation or 20%, while
SSF has a standard deviation of 22%. From this information can you conclude that either EMF or
SSF is an efficient portfolio? Can you say that either portfolio is inefficient (i.e., does not
maximize return for a given risk level?
10) An efficient portfolio is one that ________.
A) guarantees a predetermined rate of return
B) maximizes return for a given level of risk
C) consists of a single asset, which gives maximum return
D) maximizes return at all risk levels
11) An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K;
$25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will
be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested
in asset K, with an expected annual return of 8 percent. The expected annual return of this
portfolio is ________.
A) 12.67%
B) 12.00%
C) 10.00%
D) 11.78%
12) Given the returns of two stocks J and K in the table below over the next 4 years. Find the
expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock
K over the next 4 years:
Stock J
Stock K
2020
10%
9%
2021
12%
8%
2022
13%
10%
2023
15%
11%
A) 10.7% and 1.34%
B) 10.6% and 1.79%
C) 10.6% and 1.16%
D) 14.3% and 2.02%
13) ________ is a statistical measure of the relationship between any two series of numbers.
A) Coefficient of variation
B) Standard deviation
C) Correlation
D) Probability
14) Perfectly ________ correlated series move exactly together and have a correlation coefficient
of ________, while perfectly ________ correlated series move exactly in opposite directions and
have a correlation coefficient of ________.
A) negatively; -1; positively; +1
B) negatively; +1; positively; -1
C) positively; -1; negatively; +1
D) positively; +1; negatively; -1
15) Combining negatively correlated assets having the same expected return results in a portfolio
with ________ level of expected return and ________ level of risk.
A) a higher; a lower
B) the same; a higher
C) the same; a lower
D) a lower; a higher
16) The correlation of returns between Asset A and Asset B can be characterized as ________.
(See Table 8.1)
A) perfectly positively correlated
B) perfectly negatively correlated
C) uncorrelated
D) partially correlated
17) If you were to create a portfolio designed to reduce risk by investing equal proportions in
each of two different assets, which portfolio would you recommend? (See Table 8.1)
A) Assets A and B
B) Assets A and C
C) none of the available combinations
D) cannot be determined
18) The portfolio with a standard deviation of zero ________. (See Table 8.1)
A) is comprised of Assets A and B
B) is comprised of Assets A and C
C) is not possible
D) cannot be determined
19) Akai has a portfolio of three assets. Find the expected rate of return for the portfolio
assuming he invests 50 percent of its money in asset A with 10 percent rate of return, 30 percent
in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of
return.
20) Combining assets that are not perfectly positively correlated with each other can reduce the
overall variability of returns.
21) Even if assets are not negatively correlated, the lower the correlation between them, the
lower the resulting risk of the portfolio.
22) In general, the lower the correlation between asset returns, the greater the benefit of
diversification.
23) A portfolio of two negatively correlated assets may have less risk than either of the
individual assets.
24) Under no circumstance would adding an asset to a portfolio increase the risk of the portfolio
above the risk of the most risky asset in the portfolio.
25) A portfolio that combines two assets having perfectly positively correlated returns cannot
reduce the portfolio’s overall risk below the risk of the least risky asset.
26) A portfolio combining two assets with less than perfectly positive correlation can reduce
total risk to a level below that of either of the components.
27) Uncorrelated assets have correlation coefficient close to zero.
28) Combining uncorrelated assets can reduce risk—not as effectively as combining negatively
correlated assets, but more effectively than combining positively correlated assets.
29) A firm has high sales when the economy is expanding and low sales during a recession. This
firm’s overall risk will be higher if it invests in another product which is counter cyclical.
30) A portfolio combining two assets whose returns are less than perfectly positive correlated
can increase total risk to a level above that of either of the components.
31) The risk of a portfolio containing international stocks generally contains less nondiversifiable
risk than one that contains only domestic stocks.
32) The inclusion of assets from countries with business cycles that are not highly correlated
with the U.S. business cycle reduces the portfolio’s responsiveness to market movements.
33) Returns (relative to risk) from internationally diversified portfolios tend to be superior to
those yielded by purely domestic ones.
34) When the U.S. currency gains in value, the dollar value of a foreign-currency-denominated
portfolio of assets decline.
35) The risk of a portfolio containing international stocks generally does not contain less
nondiversifiable risk than one that contains only domestic stocks.
36) Combining two less than perfectly positively correlated assets to reduce risk is known as
________.
A) diversification
B) valuation
C) securitization
D) risk aversion
37) The lower the correlation between asset returns, the ________.
A) lesser the potential diversification of risk
B) greater the potential diversification of risk
C) lower the potential profit
D) lesser the assets have to be monitored
38) If two assets having perfectly negatively correlated returns are combined in a portfolio, then
some combination of those two assets will ________.
A) have more risk than either asset does on its own
B) have no risk at all
C) have a higher return than either asset does on its own
D) have a lower return than either asset does on its own
39) Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an
expected return of 15% and a standard deviation of 30%. The correlation between the two assets
is 1.0. Portfolios of these two assets will have an expected return ________.
A) between 0% and 15%
B) between 10% and 15%
C) below 10%
D) above 15%
40) Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an
expected return of 15% and a standard deviation of 30%. The correlation between the two assets
is -1.0. Portfolios of these two assets will have a standard deviation ________.
A) between 0% and 20%
B) between 0% and 30%
C) below 10%
D) between 20% and 30%
41) Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an
expected return of 15% and a standard deviation of 30%. The correlation between the two assets
is -1.0. Portfolios of these two assets will have an expected return ________.
A) between 0% and 15%
B) between 10% and 15%
C) below 10%
D) above 15%
42) Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an
expected return of 15% and a standard deviation of 30%. The correlation between the two assets
is less than 1.0. You form a portfolio by investing half of your money in asset 1 and half in asset
2. Which of the following best describes the expected return and standard deviation of your
portfolio?
A) The expected return is 12.5% and the standard deviation is less than 25%.
B) The expected return is between 10% and 15% and the standard deviation is greater than 30%.
C) The expected return is 12.5% and the standard deviation is 25%.
D) The expected return is 12.5% and the standard deviation is greater than 25%.
43) Combining two assets having perfectly positively correlated returns will result in the creation
of a portfolio with an overall risk that ________.
A) remains unchanged
B) decreases to a level below that of either asset
C) increases to a level above that of either asset
D) lies between the asset with the higher risk and the asset with the lower risk
1) The difference between the return on the market portfolio of assets and the risk-free rate of
return represents the premium the investor must receive for taking the average amount of risk
associated with holding the market portfolio of assets.
2) Total risk is the sum of a security’s nondiversifiable and diversifiable risk.
3) Total risk is attributable to firm-specific events, such as strikes, lawsuits, regulatory actions, or
the loss of a key account.
4) As any investor can create a portfolio of assets that will eliminate all, or virtually all,
nondiversifiable risk, the only relevant risk is diversifiable risk.
5) Diversifiable risk is the relevant portion of risk attributable to market factors that affect all
firms.
6) Diversified investors should be concerned solely with nondiversifiable risk because they can
easily create a portfolio of assets that will eliminate all, or virtually all, diversifiable risk.
7) Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of
the portfolio.
8) Systematic risk is that portion of an asset’s risk that is attributable to firm-specific, random
causes.
9) Unsystematic risk can be eliminated through diversification.
10) Unsystematic risk is the relevant portion of an asset’s risk attributable to market factors that
affect all firms.
11) The required return on an asset is an increasing function of its nondiversifiable risk.
12) The empirical measurement of beta can be approached by using least-squares regression
analysis to find the regression coefficient (bj) in the equation for the slope of the “characteristic
line.”
13) Investors should recognize that betas are calculated using historical data and that past
performance relative to the market average may not accurately predict future performance.
14) The beta coefficient is an index that measures the degree of movement of an asset’s return in
response to a change in the market return.
15) The beta coefficient is an index of the degree of movement of an asset’s return in response to
a change in the risk-free asset.
16) Systematic risk is also referred to as ________.
A) business specific risk
B) internal risk
C) nondiversifiable risk
D) maturity risk
17) Risk that affects all firms is called ________.
A) maturity risk
B) unsystematic risk
C) nondiversifiable risk
D) reinvestment risk
18) The portion of an asset’s risk that is attributable to firm-specific, random causes is called
________.
A) unsystematic risk
B) nondiversifiable risk
C) market risk
D) political risk
19) The relevant portion of an asset’s risk, attributable to market factors that affect all firms, is
called ________.
A) credit risk
B) diversifiable risk
C) systematic risk
D) maturity risk
20) ________ risk represents the portion of an asset’s risk that can be eliminated by combining
assets with less than perfect positive correlation.
A) Diversifiable
B) Market
C) Systematic
D) Economic
21) Unsystematic risk ________.
A) does not change
B) can be eliminated through diversification
C) cannot be estimated
D) affects all firms in a market
22) Strikes, lawsuits, regulatory actions, or the loss of a key account are all examples of
________.
A) diversifiable risk
B) market risk
C) economic risk
D) systematic risk
23) War, inflation, and the condition of the foreign markets are all examples of ________.
A) business specific risk
B) nondiversifiable risk
C) internal risk
D) unsystematic risk
25) A beta coefficient of -1 represents an asset that ________.
A) is more responsive than the market portfolio
B) has the same response as the market portfolio but in opposite direction
C) is less responsive than the market portfolio
D) is unaffected by market movement
26) The purpose of adding an asset with a negative or low positive beta to a portfolio is to
________.
A) reduce profit
B) reduce risk
C) increase profit
D) increase risk
27) The beta associated with a risk-free asset ________.
A) is greater than 1
B) is less than 1
C) is equal to 0
D) is between 0 and 1
28) A beta coefficient of 0 represents an asset that ________.
A) has an expected return greater than the market portfolio
B) has the same expected return as the market portfolio
C) has returns that do not fluctuate at all
D) has an expected return equal to the risk-free rate
29) An investment banker has recommended a $100,000 portfolio containing assets B, D, and F.
$20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a
beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is
________.
A) 1.25
B) 1.33
C) 1.45
D) 1.85
30) The higher an asset’s beta, ________.
A) the more responsive it is to changing market returns
B) the less responsive it is to changing market returns
C) the higher the expected return will be in a down market
D) the lower the expected return will be in an up market