Investment Management CIC2004

Which of the following statements regarding risk- averse is true ? 

• They only care about the rate of return.

• They only accept risky investments that offer risk premiums over the risk-free rate. 

• They accept investments that are fair games. 

• They are willing to accept lower returns and high risk.

   2.   Beta is a measure of security responsiveness to__________.

                

• Firm-specific risk

                

•   Diversifiable risk

•  Market risk 

             

•      Unique risk  

  3.   The risk that can be diversified away is __________. 

• Beta

• Firm-specific risk

• Market risk

• Systematic risk

      4.     The correlation coefficient between two assets equals ____________.

            

•   A. their covariance divided by the product of their variances 

            

•     B. their covariance divided by the product of their standard deviation 

             

•    C. the product of their variances divided by their covariance

             

•    D. the sum of their expected returns divided by their covariance.

5.   Diversification is most effective when security returns are

• High

• Negatively correlated

• Positively correlated 

• Uncorrelated 

6.  Siti is a risk-averse investor, David is a less risk-averse investor than Siti. Therefore, 

             

•   A)  for the same return, David tends to tolerate higher risk than Siti.

            

•      B)  for the same risk, Siti requires a lower rate of return than David.

              

•    C)  for the same risk, David requires a higher rate of return than Siti.

               

•   D)   for the same return, Siti tolerates higher risk than David.

    7.  According to the mean-variance criterion, which one of the following investments dominates all others ? 

               

• A)  E(r) = 0.15 ; Variance = 0.25

             

•     B)  E(r) = 0.10 ; Variance = 0.25

             

•     C)  E(r) = 0.15 ; Variance = 0.20

              

•    D)  none of the above

  8.   The variable (A) in the utility function represents the : 

                

               

•  A) Certainty- equivalent rate of the portfolio.

     

•              B) Index of the investor’s risk aversion 

            

•       C) Investor’s return requirement 

       

•            D) Minimum required utility of the portfolio

    9.    Which of the following statistics cannot be negative ?

•  Covariance 

• Variance 

• E(r)

• Correlation coefficient

   10 Which of the statements is true?

• a) a portfolio’s risk is likely to be smaller than the average of all stock’s standard deviations, because diversification lowers the portfolio’s risk

• b) the effects of diversification, the portfolio’s risk is likely to be more than the average of all stock’s standard deviations

• c) portfolio risk will increase if more stocks that are negatively correlated with other stocks are added to the portfolio

• d) the unsystematic risk component of the total portfolio risk can be increased by adding negatively correlated stocks to the portfolio.