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Exam 7: Optimal Risky Portfolios

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Question 21

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Consider the following probability distribution for stocks C and D: $\begin{array} { c c c c } \text { State } & \text { Probability } & \text { Return on Stock C } & \text { Return on Stock D } \\1 & 0.30 & 7 \% & - 9 \% \\2 & 0.50 & 11 \% & 14 \% \\3 & 0.20 & - 16 \% & 26 \% \\\hline\end{array}$ The coefficient of correlation between C and D is

A) 0.67.
B) 0.50.
C) -0.50.
D) -0.67.
E) None of the options are correct.

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Question 22

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The global minimum variance portfolio formed from two risky securities will be riskless when the correlation coefficient between the two securities is

A) 0.0.
B) 1.0.
C) 0.5.
D) -1.0.
E) any negative number.

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Question 23

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Which of the following is not a source of systematic risk?

Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz? $\begin{array} { c r r } \text { Portfolio } & \begin{array} { r } \text { Expected } \\\text { Return }\end{array} & \begin{array} { r } \text { Standard } \\\text { Deviation }\end{array} \\\text { W } & 9 \% & 21 \% \\\text { X } & 5 \% & 7 \% \\\text { Y } & 15 \% & 36 \% \\\text { Z } & 12 \% & 15 \% \\\hline\end{array}$

Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL?

The risk that cannot be diversified away is

Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky securities? I.The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance. II. There is a linear relationship between the securities' coefficient of correlation and the portfolio variance. III. The degree to which the portfolio variance is reduced depends on the degree of correlation between Securities.

Consider two perfectly negatively correlated risky securities A and B A has an expected rate of return of 12% and a standard deviation of 17%. B has an expected rate of return of 9% and a standard deviation of 14%. The risk-free portfolio that can be formed with the two securities will earn _____ rate of return.

Consider the following probability distribution for stocks C and D: $\begin{array} { c c c c } \text { State } & \text { Probability } & \text { Return on Stock C } & \text { Return on Stock D } \\1 & 0.30 & 7 \% & - 9 \% \\2 & 0.50 & 11 \% & 14 \% \\3 & 0.20 & - 16 \% & 26 \% \\\hline\end{array}$ The standard deviations of stocks C and D are _____ and _____, respectively.

Firm-specific risk is also referred to as

Consider the following probability distribution for stocks A and B: $\begin{array} { c c c c } \text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \\\hline 1 & 0.10 & 10 \% & 8 \% \\2 & 0.20 & 13 \% & 7 \% \\3 & 0.20 & 12 \% & 6 \% \\4 & 0.30 & 14 \% & 9 \% \\5 & 0.20 & 15 \% & 8 \% \\\hline\end{array}$ If you invest 40% of your money in A and 60% in B, what would be your portfolio's expected rate of return and standard deviation?

The standard deviation of a portfolio of risky securities is

In words, the covariance considers the probability of each scenario happening and the interaction between

Security X has expected return of 12% and standard deviation of 18%. Security Y has expected return of 15% and standard deviation of 26%. If the two securities have a correlation coefficient of 0.7, what is their Covariance?

Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%, and a risk free rate of 3%, what is the slope of the best feasible CAL?

The unsystematic risk of a specific security

Nonsystematic risk is also referred to as

Given an optimal risky portfolio with expected return of 13%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?

Consider the following probability distribution for stocks A and B: $\begin{array} { c c c c } \text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \\1 & 0.15 & 8 \% & 8 \% \\2 & 0.20 & 13 \% & 7 \% \\3 & 0.15 & 12 \% & 6 \% \\4 & 0.30 & 14 \% & 9 \% \\5 & 0.20 & 16 \% & 11 \% \\\hline\end{array}$ The standard deviations of stocks A and B are _____ and _____, respectively.

Consider two perfectly negatively correlated risky securities A and B A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. The risk-free portfolio that can be formed with the two securities will earn a(n) _____ rate of return.