6Key1.Risk that can be eliminated through diversification is called ______ risk.A.uniqueB.firm-specificC.diversifiableD. all of the aboveBodie - Chapter 06 #1Difficulty: Easy2.The _______ decision should take precedence over the _____ decision.A.asset allocation, stock selectionB.bond selection, mutual fund selectionC.stock selection, asset allocationD.stock selection, mutual fund selectionBodie - Chapter 06 #2Difficulty: Medium 3.Many current and retired Enron Corp. employees had their 401k retirement accounts wiped outwhen Enron collapsed because ___.A.they had to pay huge fines for obstruction of justiceB.their 401k accounts were held outside the companyC. their 401k accounts were not well diversifiedD. none of the aboveBodie - Chapter 06 #3Difficulty: Easy 4.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 zeroII. The correlation coefficient between Security A and C is negativeIII. The correlation coefficient between Security B and C is positiveA. I onlyB. I and II onlyC.II and III onlyD.I, II and IIIBodie - Chapter 06 #4Difficulty: Hard5.Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has anexpected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer aportfolio using the risk-free asset and ______.A.asset AB.asset BC.no risky assetD.can't tell from the data givenBodie - Chapter 06 #5Difficulty: Medium 6.Adding additional risky assets to the investment opportunity set will generally move theefficient frontier _____ and to the ______.A. up, rightB. up, leftC.down, rightD.down, leftBodie - Chapter 06 #6Difficulty: Medium7.An investor's degree of risk aversion will determine his or her ______.A.optimal risky portfolioB.risk-free rateC. optimal mix of the risk-free asset and risky assetD. capital allocation lineBodie - Chapter 06 #7Difficulty: Medium8.The ________ is equal to the square root of the systematic variance divided by the total variance.A. covarianceB. correlation coefficientC.standard deviationD.reward-to-variability ratioBodie - Chapter 06 #8Difficulty: Medium9.Which of the following statistics cannot be negative?A. CovarianceB. VarianceC.E[r]D.Correlation coefficientBodie - Chapter 06 #9Difficulty: Easy10.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. .40B. .50C. .75D. .80Bodie - Chapter 06 #10Difficulty: Medium11.The correlation coefficient between two assets equals to _________.A.their covariance divided by the product of their variancesB.the product of their variances divided by their covarianceC.the sum of their expected returns divided by their covarianceD. their covariance divided by the product of their standard deviationsBodie - Chapter 06 #11Difficulty: Medium12.Diversification is most effective when security returns are _________.A. highB. negatively correlatedC.positively correlatedD.uncorrelatedBodie - Chapter 06 #12Difficulty: Easy13.The expected rate of return of a portfolio of risky securities is _________.A.the sum of the securities' covariancesB.the sum of the securities' variancesC. the weighted sum of the securities' expected returnsD. the weighted sum of the securities' variancesBodie - Chapter 06 #13Difficulty: Easy14.Beta is a measure of security responsiveness to _________.A.firm specific riskB.diversifiable riskC. market riskD. unique riskBodie - Chapter 06 #14Difficulty: Easy15.The risk that can be diversified away is __________.A. betaB. firm specific riskC.market riskD.systematic riskBodie - Chapter 06 #15Difficulty: Easy 16.To eliminate the bias in calculating the variance and covariance of returns from historical datathe average squared deviation must be multiplied by _________.A.n/(n - 1)B.n * (n - 1)C.(n - 1)/nD.(n - 1) * nBodie - Chapter 06 #16Difficulty: Medium 17.Consider an investment opportunity set formed with two securities that are perfectly negativelycorrelated. The global minimum variance portfolio has a standard deviation that is always _________.A.equal to the sum of the securities standard deviationsB.equal to -1C. equal to 0D. greater than 0Bodie - Chapter 06 #17Difficulty: Medium18.Market risk is also called __________ and _________.A. systematic risk, diversifiable riskB. systematic risk, nondiversifiable riskC.unique risk, nondiversifiable riskD.unique risk, diversifiable riskBodie - Chapter 06 #18Difficulty: Easy19.Firm specific risk is also called __________ and __________.A.systematic risk, diversifiable riskB.systematic risk, non-diversifiable riskC.unique risk, non-diversifiable riskD. unique risk, diversifiable riskBodie - Chapter 06 #19Difficulty: Easy20.Which one of the following stock return statistics fluctuates the most over time?A.Covariance of returnsB.Variance of returnsC. Average returnD. Correlation coefficientBodie - Chapter 06 #20Difficulty: Medium21.Harry Markowitz is best known for his Nobel prize winning work on _____________.A. strategies for active securities tradingB. techniques used to identify efficient portfolios of risky assetsC.techniques used to measure the systematic risk of securitiesD.techniques used in valuing securities optionsBodie - Chapter 06 #21Difficulty: Easy22.Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.A. the returns on the stock and bond portfolio tend to move inverselyB. the returns on the stock and bond portfolio tend to vary independently of each otherC.the returns on the stock and bond portfolio tend to move togetherD.the covariance of the stock and bond portfolio will be positiveBodie - Chapter 06 #22Difficulty: Easy 23.You put half of your money in a stock portfolio that has an expected return of 14% and a standarddeviation 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 stock and bond portfolio have a correlation 0.55. Thestandard 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%σ2p = 0.02592 = (.52)(.242) + (.52)(.122) + 2(.5)(.5)(.24)(.12)0.55; σ = 16.1%Bodie - Chapter 06 #23Difficulty: Hard24.On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the_____________ of the current investment opportunity set.A.left and aboveB.left and belowC.right and aboveD.right and belowBodie - Chapter 06 #24Difficulty: Easy25.The term "complete portfolio" refers to a portfolio consisting of _________________.A.the risk-free asset combined with at least one risky assetB.the market portfolio combined with the minimum variance portfolioC.securities from domestic markets combined with securities from foreign marketsmon stocks combined with bondsBodie - Chapter 06 #25Difficulty: Easy26.Rational risk-averse investors will always prefer portfolios _____________.A. located on the efficient frontier to those located on the capital market lineB. located on the capital market line to those located on the efficient frontierC. at or near the minimum variance point on the efficient frontierD. that are risk-free to all other asset choicesBodie - Chapter 06 #26Difficulty: Easy27.The optimal risky portfolio can be identified by finding ____________.I. the minimum variance point on the efficient frontierII. the maximum return point on the efficient frontier the minimum variance point on theefficient frontierIII. the tangency point of the capital market line and the efficient frontierIV. the line with the steepest slope that connects the risk free rate to the efficient frontierA.I and II onlyB.II and III onlyC.III and IV onlyD.I and IV onlyBodie - Chapter 06 #27Difficulty: Medium28.Reward-to-variability ratios are ________ on the ________ capital market line.A.lower; steeperB.higher; flatterC.higher; steeperD.the same; flatterBodie - Chapter 06 #28Difficulty: Medium29.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24% while stockB 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. 0.583 B. 0.225 C. 0.327 D. 0.1280.0380 = (.62)(.242) + (.42)(.182) + 2(.6)(.4)(.24)(.18) ρ; ρ = 0.583Bodie - Chapter 06 #29Difficulty: Hard30. 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 _________.A. .12B. .36C. .60D. .77Correlation =Bodie - Chapter 06 #30 Difficulty: Medium31.A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stockB has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. 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. 23.00%B. 19.76%C. 18.45%D. 17.67%σ2p = (.402)(.352) + (.602)(.15)2 +(2)(.4)(.6)(.35)(.15)(.45) σ2p = .039046 σp = 19.76%Bodie - Chapter 06 #31 Difficulty: Medium32.The standard deviation of return on investment A is .10 while the standard deviation of return oninvestment B is .04. If the correlation coefficient between the returns on A and B is -.50, thecovariance of returns on A and B is _________.A. -.0447B. -.0020C. .0020D. .0447Bodie - Chapter 06 #32Difficulty: Medium 33.Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate ofreturn of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and astandard deviation of return of 30%. The weight of security B in the minimum variance portfolio is_________.A.10%B.20%C. 40%D. 60%Bodie - Chapter 06 #33Difficulty: Hard An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expectedreturn 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 0.50.The risk-free rate of return is 10%.Bodie - Chapter 0634.The proportion of the optimal risky portfolio that should be invested in stock A is _________.A.0%B.40%C.60%D.100%Bodie - Chapter 06 #34Difficulty: HardA.14.0%B.15.6%C.16.4%D.18.0%Bodie - Chapter 06 #35Difficulty: Hard36.The standard deviation of return on the optimal risky portfolio is _________.A. 0%B. 5%C.7%D.20%Bodie - Chapter 06 #36Difficulty: Hard An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expectedreturn 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 0.4.The risk-free rate of return is 5%.Bodie - Chapter 06 37.The proportion of the optimal risky portfolio that should be invested in stock B is approximately_________.A.29%B.44%C.56%D. 71%WB = 71%Bodie - Chapter 06 #37Difficulty: HardA. 14%B. 16%C.18%D.19%E[r p] = (.29)(.21) + (.71)(.14) = 16%Bodie - Chapter 06 #38Difficulty: Hard39.The standard deviation of the returns on the optimal risky portfolio is _________.A.25.5%B.22.3%C. 21.4%D. 20.7%σ2rp = (.292)(.392) + (.712)(.202) +2(.29)(.71)(.39)(.20).4 σ2rp = .045804σrp = 21.4%Bodie - Chapter 06 #39Difficulty: Hard C.An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return onstock A is 24% while the standard deviation on stock B is 14%. The correlation coefficient between thereturn on A and B is 0.35. The expected return on stock A is 25% while on stock B it is 11%. Theproportion of the minimum variance portfolio that would be invested in stock B is approximately_________.45%67%C. 85%D. 92%WB = ; COVAB = ρABσAσB = (.35)(.24)(.14) = .01176WB =Bodie - Chapter 06 #40Difficulty: Hard41.An investor can design a risky portfolio based on two stocks, A and B. The standard deviation ofreturn on stock A is 20% while the standard deviation on stock B is 15%. The expected return on stockA is 20% while on stockB it is 10%. The correlation coefficient between the return on A and B is 0%.The expected return on the minimum variance portfolio is approximately _________.A. 10.00%B. 13.60%C.15.00%D.19.41%Bodie - Chapter 06 #41Difficulty: Hard 42.An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return onstock A is 20% while the standard deviation on stock 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_________.A.0%B.6%C. 12%D. 17%Bodie - Chapter 06 #42Difficulty: Hard43. A measure of the riskiness of an asset held in isolation is ____________.A. betaB. standard deviationC.covarianceD.semi-varianceBodie - Chapter 06 #43Difficulty: Easy44.Semitool Corp has an expected excess return of 6% for next year. However for every unexpected 1%change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information whatwas Semitool's actual excess return?A.7.00%B.8.50%C. 8.80%D. 9.25%6% + (1.5%)(1.2) + 1% = 8.8%Bodie - Chapter 06 #44Difficulty: Medium45.The part of a stock's return that is systematic is a function of which of the following variables?I. Volatility in excess returns of the stock marketII. The sensitivity of the stock's returns to changes in the stock marketIII. The variance in the stock's returns that is unrelated to the overall stock marketA. I onlyB. I and II onlyC.II and III onlyD.I, II and IIIBodie - Chapter 06 #45Difficulty: Easy 46.Stock A has a beta of 1.2 and Stock B has a beta of 1. The returns of Stock A are ______ sensitiveto changes in the market as the returns of Stock B.A.20% moreB.slightly moreC.20% lessD.slightly lessBodie - Chapter 06 #46Difficulty: Easy 47.Which risk can be diversified away as additional securities are added to aportfolio? I. Total riskII. Systematic riskIII. Firm specific riskA.I onlyB.I and II onlyC.I, II, and IIID.I and IIIBodie - Chapter 06 #47Difficulty: Easy48.According to Tobin's separation property, portfolio choice can be separated into two independenttasks consisting of __________ and __________.A identifying all investor imposed constraints; identifying the set of securities that conform to the. investor's constraints and offer the best risk-return tradeoffsB. identifying the investor's degree of risk aversion; choosing securities from industry groups thatare consistent with the investor's risk profileC identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal. risky portfolio based on the investor's degree of risk aversionD choosing which risky assets an investor prefers according to their risk aversion level; minimizing the. CAL by lending at the risk-free rateBodie - Chapter 06 #48Difficulty: Medium 49.You are constructing a scatter plot of excess returns for Stock A versus the market index. If thecorrelation coefficient between Stock A and the index is -1 you will find that the points of the scatter diagram ______________________ and the line of best fit has a ______________.A. all fall on the line of best fit; positive slopeB. all fall on the line of best fit; negative slopeC.are widely scattered around the line; positive slopeD.are widely scattered around the line; negative slopeBodie - Chapter 06 #49Difficulty: Medium50.The term excess-return refers to ______________.A. returns earned illegally by means of insider tradingB. the difference between the rate of return earned and the risk-free rateD.the difference between the rate of return earned on a particular security and the rate of returnearned on other securities of equivalent riskE.the portion of the return on a security which represents tax liability and therefore cannot bereinvestedBodie - Chapter 06 #50Difficulty: Easy 51.You are recalculating the risk of ACE stock in relation to the market index and you find the ratio ofthe systematic variance to the total variance has risen. You must also find that the ____________.A.covariance between ACE and the market has fallenB.correlation coefficient between ACE and the market has fallenC. correlation coefficient between ACE and the market has risenD. unsystematic risk of ACE has risenBodie - Chapter 06 #51Difficulty: Medium52. A stock has a correlation with the market of 0.45. The standard deviation of the market is 21% andthe standard deviation of the stock is 35%. What is the stock's beta?A. 1.00B. 0.75C.0.60D.0.55β =Bodie - Chapter 06 #52Difficulty: Medium53.The values of beta coefficients of securities are __________.A.always positiveB.always negativeC.always between positive 1 and negative 1D. usually positive, but are not restricted in any particular wayBodie - Chapter 06 #53Difficulty: Easy54. A security's beta coefficient will be negative if ____________.A.its returns are negatively correlated with market index returnsB.its returns are positively correlated with market index returnsC.its stock price has historically been very stableD.market demand for the firm's shares is very lowBodie - Chapter 06 #54Difficulty: Easy 55.The market value weighted average beta of firms included in the market index will always be_____________.A.0B.between 0 and 1C. 1D. There is no particular rule concerning the average beta of firms included in the market indexBodie - Chapter 06 #55Difficulty: Easy56.Diversification can reduce or eliminate __________ risk.A.allB.systematicC. non-systematicD. only an insignificantBodie - Chapter 06 #56Difficulty: Easy57.In order to construct a riskless portfolio using two risky stocks, one would need to find two stocks witha correlation coefficient of ________.A.1.0B.0.5C.0D. -1.0Bodie - Chapter 06 #57Difficulty: Easy 58.Some diversification benefits can be achieved by combining securities in a portfolio as long asthe correlation between the securities is _____________.A. 1B. less than 1C.between 0 and 1D.less than or equal to 0Bodie - Chapter 06 #58Difficulty: Easy 59.If an investor does not diversify their portfolio and instead puts all of their money in one stock,the appropriate measure of security risk for that investor is the ________.A.stock's standard deviationB.variance of the marketC.stock's betaD.covariance with the market indexBodie - Chapter 06 #59Difficulty: Medium60.Which of the following provides the best example of a systematic risk event?A.A strike by union workers hurts a firm's quarterly earnings.B.Mad Cow disease in Montana hurts local ranchers and buyers of beef.C. The Federal Reserve increases interest rates 50 basis points.D. A senior executive at a firm embezzles $10 million and escapes to South America.Bodie - Chapter 06 #60Difficulty: Easy61.Which of the following statements is true regarding time diversification?I. The standard deviation of the average annual rate of return over severalyears will be smaller than the one-year standard deviation.II. For a longer time horizon, uncertainty compounds over a greaternumber of years.III. Time diversification does not reduce risk.A.I onlyB.II onlyC.II and III onlyD.I, II and IIIE.None of the statements are correctBodie - Chapter 06 #61Difficulty: Medium62.You find that the annual standard deviation of a stock's returns is equal to 25%. For a 3 yearholding period the standard deviation of your total return would equal _______.A.75%B.25%C. 43%D. 55%Bodie - Chapter 06 #62Difficulty: EasyBodie - Chapter 0663.The beta of this stock is ____.A.0.12B.0.35C. 1.32D. 4.05Beta equals slope coefficient = 1.32Bodie - Chapter 06 #63Difficulty: Easy64.This stock has greater systematic risk than a stock with a beta of ___.A.0.50B.1.50C.2.00D.3.000.50 < 1.32Bodie - Chapter 06 #64Difficulty: Easy65.The characteristic line for this stock is Rstock = ___ + ___ Rmarket.A. 0.35, 0.12B. 4.05, 1.32C.15.44, 0.97D.0.26, 1.36Intercept equals 4.05 and slope equals 1.32.Bodie - Chapter 06 #65Difficulty: Medium66.____ percent of the variance is explained by this regression.A.12B.35C.4.05D.80R 2= 12 means 12% of the variance is explained by the regression.Bodie - Chapter 06 #66Difficulty: Medium67.The stock is ______ riskier than the typical stock.A.32%B.15.44%C.12%D.38%Beta of 1.32 means that this stock is 32% riskier than the market.Bodie - Chapter 06 #67Difficulty: Medium 68.Decreasing the number of stocks in a portfolio from 50 to 10 would likely_________________________.A. increase the systematic risk of the portfolioB. increase the unsystematic risk of the portfolioC.increase the return of the portfolioD.decrease the variation in returns the investor faces in any one yearBodie - Chapter 06 #68Difficulty: Medium69.If you want to know the portfolio standard deviation for a three stock portfolio you will have toA.calculate two covariances and one trivarianceB.calculate only two covariancesC. calculate three covariancesD. average the variances of the individual stocksBodie - Chapter 06 #69Difficulty: Medium70.Which of the following correlations coefficients will produce the least diversification benefit?A.-0.6B.-0.3C.0.0D. 0.8Bodie - Chapter 06 #70Difficulty: Easy71.Which of the following correlation coefficients will produce the most diversification benefits?A. -0.6B. -0.9C.0.0D.0.4Bodie - Chapter 06 #71Difficulty: Easy72.What is the most likely correlation coefficient between a stock index mutual fund and the S&P 500?A.-1.0B.0.0C. 1.0D. 0.5Bodie - Chapter 06 #72Difficulty: Easy73.Investing in two assets with a correlation coefficient of -0.5 will reduce what kind of risk?A.Market riskB.Non-diversifiable riskC.Systematic riskD. Unique riskBodie - Chapter 06 #73Difficulty: Easy74.Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?A.Market riskB.Unique riskC.Unsystematic riskD. With a correlation of 1.0, no risk will be reducedBodie - Chapter 06 #74Difficulty: Easy75. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called __________.A. firm specific riskB. systematic riskC. unique riskD. none of the aboveBodie - Chapter 06 #75Difficulty: Easy76. 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 investmenthorizons II. the overall risk of your investment will compound over time III. your overall risk on the investment will fallA. I onlyB. I and II onlyC. III onlyD. I, II and IIIBodie - Chapter 06 #76 Difficulty: Medium77.You are considering adding a new security to your portfolio. In order to decide whether you should add the security you need to know the security's _______. I. expected return II. standard deviationIII. correlation with your portfolio A. I onlyB. I and II onlyC. I and III onlyD. I, II and IIIBodie - Chapter 06 #77 Difficulty: Medium78. Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two asset portfolio where the correlation coefficient is positive?A.σ2rp < (W 12σ12 + W 22σ22)B. σ2rp = (W 12σ12 + W 22σ22)C. σ2rp = (W 12σ12 - W 22σ22)D.σ2rp > (W 12σ12 + W 22σ22)Bodie - Chapter 06 #78 Difficulty: Medium79.What is the standard deviation of a portfolio of two stocks given the following data? Stock A has astandard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% ofstock A and the correlation coefficient between the two stocks is -.23.A.9.7%B.12.2%C.14.0%D.15.6%Bodie - Chapter 06 #79Difficulty: Medium 80.What is the standard deviation of a portfolio of two stocks given the following data? Stock A has astandard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% ofstock A and the correlation coefficient between the two stocks is -1.0.A. 0.0%B. 10.8%C.18.0%D.24.0%Bodie - Chapter 06 #80Difficulty: Medium 81.The expected return of portfolio is 8.9% and the risk free rate is 3.5%. If the portfolio standarddeviation is 12.0%, what is the reward to variability ratio of the portfolio?A. 0.0B. 0.45C.0.74D.1.35Reward to variability ratio = (.089 - .035)/.12 = 0.45Bodie - Chapter 06 #81Difficulty: Medium82. A project has a 60% chance of doubling your investment in one year and a 40% chance of losing half your money. What is the standard deviation of this investment? A. 25% B. 50% C. 62% D. 73%E[r p ] = (.60)(1) + (.40)(-.5) = .40σ2rp = (.60)(1 - .40)2 + (.40)(-.5 - .40)2 = .54 σrp = .73Bodie - Chapter 06 #82 Difficulty: Medium83. 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?A. 0%B. 25%C. 50%D. 75%E[rp] = (.5)(100) + (.5)(-50) = 25%Bodie - Chapter 06 #83Difficulty: EasyThe figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index.Bodie - Chapter 0684. Which stock is likely to further reduce risk for an investor currently holding his portfolio in a well diversified portfolio of common stock?A. Stock AB. Stock BC. There is no difference between A or BD. You cannot tell from the information given.Bodie - Chapter 06 #84 Difficulty: Medium。
