Diversification And Risky Asset Allocation

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Question 1

Free

Multiple Choice

Which one of the following returns is the average return you expect to earn in the future on a risky asset?

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realized return

expected return

market return

real return

adjusted return

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Question 2

Free

Multiple Choice

What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called?

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efficient return

correlated value

risk premium

expected return

realized return

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Question 3

Free

Multiple Choice

A group of stocks and bonds held by an investor is called which one of the following?

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weights

grouping

basket

portfolio

bundle

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Question 4

Free

Multiple Choice

The value of an individual security divided by the portfolio value is referred to as the portfolio:

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beta.

standard deviation.

balance.

weight.

variance.

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Question 5

Free

Multiple Choice

Diversification is investing in a variety of assets with which one of the following as the primary goal?

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increasing returns

minimizing taxes

reducing some risks

eliminating all risks

increasing the variance

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Question 6

Multiple Choice

Correlation is the:

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squared measure of a security's total risk.

extent to which the returns on two assets move together.

measurement of the systematic risk contained in an asset.

daily return on an asset compared to its previous daily return.

spreading of an investment across a number of assets.

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Question 7

Multiple Choice

The division of a portfolio's dollars among various types of assets is referred to as:

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the minimum variance portfolio.

the efficient frontier.

correlation.

asset allocation.

setting the investment opportunities.

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Question 8

Multiple Choice

Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?

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minimum variance set

financial frontier

efficient portfolio

allocated set

investment opportunity set

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Question 9

Multiple Choice

An efficient portfolio is a portfolio that does which one of the following?

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offers the highest return for the lowest possible cost

provides an evenly weighted portfolio of diverse assets

eliminates all risk while providing an expected positive rate of return

lies on the vertical axis when graphing expected returns against standard deviation

offers the highest return for a given level of risk

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Question 10

Multiple Choice

Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?

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minimum variance portfolio

Markowitz efficient frontier

correlated market frontier

asset allocation relationship

diversified portfolio line

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Question 11

Multiple Choice

Which of the following are affected by the probability of a state of the economy occurring?
I)expected return of an individual security
II)expected return of a portfolio
III)standard deviation of an individual security
IV)standard deviation of a portfolio

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I and III only

I and II only

II and IV only

III and IV only

I, II, III, and IV

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Question 12

Multiple Choice

Which one of the following statements must be true?

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All securities are projected to have higher rates of return when the economy booms versus when it is normal.

Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment.

The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession.

The total of the probabilities of the economic states can vary between zero and 100 percent.

Various economic states affect a portfolio's expected return but not the expected level of risk.

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Question 13

Multiple Choice

You own a portfolio of 5 stocks and have 3 expected states of the economy.You have twice as much invested in Stock A as you do in Stock E.How will the weights be determined when you compute the rate of return for each economic state?

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The weights will be the probability of occurrence for each economic state.

Each stock will have a weight of 20 percent for a total of 100 percent.

The weights will decline steadily from Stock A to Stock E.

The weights will be based on the amount invested in each stock as a percentage of the total amount invested.

The weights will be based on a combination of the dollar amounts invested as well as the economic probabilities.

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Question 14

Multiple Choice

Terry has a portfolio comprised of two individual securities.Which one of the following computations that he might do is NOT a weighted average?

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correlation between the securities

individual security expected return

portfolio expected return

portfolio variance

portfolio beta

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Question 15

Multiple Choice

You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy.If the probability of a booming economy decreases,your expected return will:

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decrease.

either remain constant or decrease.

remain constant.

increase.

either remain constant or increase.

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Question 16

Multiple Choice

You own three securities.Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C.The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent.Which one of the following statements is correct?

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There is no risk premium on Security C.

The risk premium on Security A exceeds that of Security B.

Security B has a risk premium that is 50 percent greater than Security A's risk premium.

The risk premium on Security C is 5 percent.

All three securities have the same expected risk premium.

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Question 17

Multiple Choice

Which of the following will increase the expected risk premium for a security,all else constant?
I)an increase in the security's expected return
II)a decrease in the security's expected return
III)an increase in the risk-free rate
IV)a decrease in the risk-free rate

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I only

III only

IV only

I and IV only

II and III only

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Question 18

Multiple Choice

If the future return on a security is known with absolute certainty,then the risk premium on that security should be equal to:

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zero.

the risk-free rate.

the market rate.

the market rate minus the risk-free rate.

the risk-free rate plus one-half the market rate.

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Question 19

Multiple Choice

You own a stock that will produce varying rates of return based upon the state of the economy.Which one of the following will measure the risk associated with owning that stock?

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weighted average return given the multiple states of the economy

rate of return for a given economic state

variance of the returns given the multiple states of the economy

correlation between the returns give the various states of the economy

correlation of the weighted average return as compared to the market

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Question 20

Multiple Choice

Which of the following affect the expected rate of return for a portfolio?
I)weight of each security held in the portfolio
II)the probability of various economic states occurring
III)the variance of each individual security
IV)the expected rate of return of each security given each economic state

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I and IV only

II and IV only

II, III, and IV only

I, II, and IV only

I, II, III, and IV

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Diversification And Risky Asset Allocation

Which one of the following returns is the average return you expect to earn in the future on a risky asset?

What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called?

A group of stocks and bonds held by an investor is called which one of the following?

The value of an individual security divided by the portfolio value is referred to as the portfolio:

Diversification is investing in a variety of assets with which one of the following as the primary goal?

Correlation is the:

The division of a portfolio's dollars among various types of assets is referred to as:

Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?

An efficient portfolio is a portfolio that does which one of the following?

Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?

Which of the following are affected by the probability of a state of the economy occurring?I)expected return of an individual securityII)expected return of a portfolioIII)standard deviation of an individual securityIV)standard deviation of a portfolio

Which one of the following statements must be true?

You own a portfolio of 5 stocks and have 3 expected states of the economy.You have twice as much invested in Stock A as you do in Stock E.How will the weights be determined when you compute the rate of return for each economic state?

Terry has a portfolio comprised of two individual securities.Which one of the following computations that he might do is NOT a weighted average?

You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy.If the probability of a booming economy decreases,your expected return will:

You own three securities.Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C.The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent.Which one of the following statements is correct?

Which of the following will increase the expected risk premium for a security,all else constant?I)an increase in the security's expected returnII)a decrease in the security's expected returnIII)an increase in the risk-free rateIV)a decrease in the risk-free rate

If the future return on a security is known with absolute certainty,then the risk premium on that security should be equal to:

You own a stock that will produce varying rates of return based upon the state of the economy.Which one of the following will measure the risk associated with owning that stock?

Which of the following affect the expected rate of return for a portfolio?I)weight of each security held in the portfolioII)the probability of various economic states occurringIII)the variance of each individual securityIV)the expected rate of return of each security given each economic state

Which of the following are affected by the probability of a state of the economy occurring?
I)expected return of an individual security
II)expected return of a portfolio
III)standard deviation of an individual security
IV)standard deviation of a portfolio

Which of the following will increase the expected risk premium for a security,all else constant?
I)an increase in the security's expected return
II)a decrease in the security's expected return
III)an increase in the risk-free rate
IV)a decrease in the risk-free rate

Which of the following affect the expected rate of return for a portfolio?
I)weight of each security held in the portfolio
II)the probability of various economic states occurring
III)the variance of each individual security
IV)the expected rate of return of each security given each economic state