CF Chap 11

Which one of these is a measure of the interrelationship between two securities?

• A) Covariance
• B) Duration
• C) Standard deviation
• D) Alpha
• E) Variance

You are considering purchasing Stock S. This stock has an expected return of 12 percent if the economy booms, 8 percent if the economy is normal, and 3 percent if the economy goes into a recessionary period. The overall expected rate of return on this stock will:

• A) be equal to one-half of 8 percent if there is a 50 percent chance of an economic boom.
• B) vary inversely with the growth of the economy.
• C) increase as the probability of a recession increases.
• D) be independent of the probability of each economic state occurring.
• E) increase as the probability of a boom economy increases

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

• A) The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers.
• B) The expected return is an arithmetic average of the individual returns for each state of the economy.
• C) The expected return is a weighted average where the probabilities of the economic states are used as the weights.
• D) The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state.
• E) As long as the total probabilities of the economic states equal 100 percent, then the expected return on the stock is a geometric average of the expected returns for each economic state

The expected return on a stock that is computed using economic probabilities is:

• A) guaranteed to equal the actual average return on the stock for the next five years.
• B) guaranteed to be the minimal rate of return on the stock over the next two years.
• C) guaranteed to equal the actual return for the immediate twelve month period.
• D) a mathematical expectation and not an actual anticipated outcome.
• E) the actual return you will receive.

The correlation between Stocks A and B is computed as the:

• A) covariance between A and B divided by the standard deviation of A times the standard deviation of B.
• B) standard deviation of A divided by the standard deviation of B.
• C) standard deviation of AB divided by the covariance between A and B.
• D) variance of A plus the variance of B divided by the covariance of AB.
• E) square root of the covariance of AB

You have plotted the monthly returns for two securities for the past five years on the same graph. The pattern of the movements of each of the two securities generally rose and fell to the same degree in step with each other. This indicates the securities have:

• A) no correlation with each other.
• B) a weak negative correlation.
• C) a strong negative correlation.
• D) a strong positive correlation.
• E) a weak positive correlation

If the covariance of Stock A with Stock B is .20, then what is the covariance of Stock B with Stock A?

• A) .20
• B) .80
• C) −.20
• D) 4
• E) −1.20

You have a portfolio comprised of two risky securities. This combination produces no diversification benefit. The lack of diversification benefits indicates the returns on the two securities:

• A) are too low for their level of risk.
• B) move perfectly opposite of one another.
• C) are too large to offset.
• D) move perfectly in sync with one another.
• E) are completely unrelated to one another.

The range of possible correlations between two securities is defined as:

• A) 0 to +1.
• B) 0 to −1.
• C) ≧ 0.
• D) ≦ 1.
• E) +1 to −1

If the correlation between two stocks is −1, the returns on the stocks:

• A) generally move in the same direction.
• B) move perfectly opposite to one another.
• C) are unrelated to one another.
• D) have standard deviations of equal size but opposite signs.
• E) totally offset each other producing a rate of return of zero