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Essentials of Investments, 11e (Bodie)
1) Risk that can be eliminated through diversification is called ________ risk.
A) unique
B) firm-specific
C) diversifiable
D) all of these options
2) 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
3) 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
4) Based on the outcomes in the following table, choose which of the statements below is (are)
correct?
Scenario
Security A
Security B
Security C
Recession
Return > E(r)
Return = E(r)
Return < E(r)
Normal
Return = E(r)
Return = E(r)
Return = E(r)
Boom
Return < E(r)
Return = E(r)
Return > E(r)
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 only
B) I and II only
C) II and III only
D) I, II, and III
5) 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.
6) 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
7) 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
8) The ________ is the covariance divided by the product of the standard deviations of the
returns on each fund.
A) covariance
B) correlation coefficient
C) standard deviation
D) reward-to-variability ratio
9) Which of the following statistics cannot be negative?
A) covariance
B) variance
C) E(r)
D) correlation coefficient
10) 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?
A) .40
B) .50
C) .75
D) .80
11) The correlation coefficient between two assets equals ________.
A) their covariance divided by the product of their variances
B) the product of their variances divided by their covariance
C) the sum of their expected returns divided by their covariance
D) their covariance divided by the product of their standard deviations
12) Diversification is most effective when security returns are ________.
A) high
B) negatively correlated
C) positively correlated
D) uncorrelated
13) The expected rate of return of a portfolio of risky securities is ________.
A) the sum of the securities' covariance
B) the sum of the securities' variance
C) the weighted sum of the securities' expected returns
D) the weighted sum of the securities' variance
14) Beta is a measure of security responsiveness to ________.
A) firm-specific risk
B) diversifiable risk
C) market risk
D) unique risk
15) The risk that can be diversified away is ________.
A) beta
B) firm-specific risk
C) market risk
D) systematic risk
16) 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
17) 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
18) 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
19) 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
20) 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
21) 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
22) 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
23) 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%
24) 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
25) 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
26) 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 risky asset efficient frontier
D) that are risk-free to all other asset choices
27) 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
28) The ________ reward-to-variability ratio is found on the ________ capital market line.
A) lowest; steepest
B) highest; flattest
C) highest; steepest
D) lowest; flattest
29) 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 ________.
A) .583
B) .225
C) .327
D) .128
30) The standard deviation of return on investment A is 10%, while the standard deviation of
return on investment B is 5%. If the covariance of returns on A and B is .0030, the correlation
coefficient between the returns on A and B is ________.
A) .12
B) .36
C) .60
D) .77
31) 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%
32) The standard deviation of return on investment A is 10%, while the standard deviation of
return on investment B is 4%. 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
33) 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%
34) 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 .50. The risk-free rate of return is 10%. The proportion of the optimal risky
portfolio that should be invested in stock A is ________.
A) 0%
B) 40%
C) 60%
D) 100%
35) 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 .50. The risk-free rate of return is 10%. The expected return on the optimal
risky portfolio is ________.
A) 14%
B) 15.6%
C) 16.4%
D) 18%
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 14% 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 standard deviation of return on
the optimal risky portfolio is ________.
A) 0%
B) 5%
C) 7%
D) 20%
37) 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 .4. The risk-free rate of return is 5%. The proportion of the optimal risky
portfolio that should be invested in stock B is approximately ________.
A) 29%
B) 44%
C) 56%
D) 71%
38) 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 .4. The risk-free rate of return is 5%. The expected return on the optimal
risky portfolio is approximately ________. (Hint: Find weights first.)
A) 14%
B) 16%
C) 18%
D) 19%
39) 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 .4. The risk-free rate of return is 5%. The standard deviation of returns on
the optimal risky portfolio is ________.
A) 25.5%
B) 22.3%
C) 21.4%
D) 20.7%
40) An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The
correlation coefficient between the returns on A and B is .35. The expected return on stock A is
25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would
be invested in stock B is approximately ________.
A) 45%
B) 67%
C) 85%
D) 92%
