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1. Risk that can be eliminated through diversification is called ______ risk.
2. The _______ decision should take precedence over the _____ decision.
3. Many current and retired Enron Corp. employees had their 401k retirement accounts
wiped out when Enron collapsed because ________.
4. Based on the outcomes in the following table, choose which of the statements below is
(are) correct?
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.
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 ______.
6. Adding additional risky assets to the investment opportunity set will generally move the
efficient frontier _____ and to the ______.
7. An investor's degree of risk aversion will determine his or her ______.
8. The ________ is equal to the square root of the systematic variance divided by the total
variance.
9. Which of the following statistics cannot be negative?
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?
11. The correlation coefficient between two assets equals _________.
12. Diversification is most effective when security returns are _________.
13. The expected rate of return of a portfolio of risky securities is _________.
14. Beta is a measure of security responsiveness to _________.
15. The risk that can be diversified away is __________.
16. Approximately how many securities does it take to diversify almost all of the unique risk
from a portfolio?
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 _________.
18. Market risk is also called __________ and _________.
19. Firm-specific risk is also called __________ and __________.
20. Which one of the following stock return statistics fluctuates the most over time?
21. Harry Markowitz is best known for his Nobel Prize-winning work on _____________.
22. Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means
that ______.
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 ________________.
p
24. On a standard expected return versus standard deviation graph, investors will prefer
portfolios that lie to the _____________ of the current investment opportunity set.
25. The term
complete portfolio
refers to a portfolio consisting of _________________.
26. Rational risk-averse investors will always prefer portfolios _____________.
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
28. The _________ reward-to-variability ratio is found on the ________ capital market line.
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 _________.
30. The standard deviation of return on investment A is .10, while the standard deviation of
return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation
coefficient between the returns on A and B is _________.
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 _________.
σ
p
32. The standard deviation of return on investment A is .10, while the standard deviation of
return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50,
the covariance of returns on A and B is _________.
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 _________.
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 _________.
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 _________.
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 _________.
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 _________.
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.)
