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Exam 6: Efficient Diversification

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Question 21

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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) can't tell from the data given

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

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Question 22

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

A) share's standard deviation
B) variance of the market
C) share's beta
D) covariance with the market index

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

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Question 23

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The ________ is equal to the square root of the systematic variance divided by the total variance.

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ________ and to the ________.

Harry Markowitz is best known for his Nobel prize-winning work on ________.

Which of the following statistics cannot be negative?

Based on the outcomes in the table below choose which of the statements is/are correct: I. The covariance of Security A and Security B is zero II. The correlation coefficient between Security A and C is negative III. The correlation coefficient between Security B and C is positive

An investor can design a risky portfolio based on two shares, A and B. The standard deviation of return on Share A is 20% while the standard deviation on Share B is 15%. The correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is ________.

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

A portfolio is composed of two shares, A and B. Share A has a standard deviation of return of 24% while Share B has a standard deviation of return of 18%. Share A comprises 60% of the portfolio while Share 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 ________.

As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that ________. I. the average risk per year may be smaller over longer investment horizons II. the overall risk of your investment will compound over time III. your overall risk on the investment will fall

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?

The risk that can be diversified away is ________.

Risk that can be eliminated through diversification is called ________ risk.

An investor can design a risky portfolio based on two shares, A and B. Share A has an expected return of 18% and a standard deviation of return of 20%. Share 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 expected return on the optimal risky portfolio is ________.

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

A project has a 50% chance of doubling your investment in one year and a 50% chance of losing half your money. What is the expected return on this investment project?

Decreasing the number of shares in a portfolio from 50 to 10 would likely ________.

You put half of your money in a share portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The share and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be ________.

Which of the following provides the best example of a systematic risk event?