Chapter 11

A dominant portfolio within an opportunity set that has the lowest possible level of risk is referred to as the:

• a.

  minimum variance portfolio.

• b.

  optimal covariance portfolio.

• c.

  upper tail of the efficient set.

• d.

  efficient frontier.

• e.

  tangency portfolio.

A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4 percent. What is the portfolio weight of Stock A?

• a.

  32.58%

• b.

  61.98%

• c.

  34.04%

• d.

  29.87%

• e.

  67.42%

A portfolio consists of three stocks. There are 540 shares of Stock A valued at $24.20 share, 310 shares of Stock B valued at $48.10 a share, and 200 shares of Stock C priced at $26.50 a share. Stocks A, B, and C are expected to return 8.3 percent, 16.4 percent, and 11.7 percent, respectively. What is the expected return on this portfolio?

• a.

  12.50%

• b.

  12.47%

• c.

  11.87%

• d.

  11.67%

• e.

  12.78%

A security that is fairly priced will have a return _____ the security market line.

• a.

  on

• b.

  above

• c.

  on or below

• d.

  below

• e.

  on or above

A stock with a beta of zero would be expected to have a rate of return equal to:

• a.

  the prime rate.

• b.

  the market rate less the risk-free rate.

• c.

  zero.

• d.

  the risk-free rate

• e.

  the market rate.

A stock with an actual return that lies above the security market line has:

• a.

  yielded a return equivalent to the level of risk assumed.

• b.

  more risk than warranted based on the realized rate of return.

• c.

  less systematic risk than the overall market.

• d.

  more systematic risk than the overall market.

• e.

  yielded a higher return than expected for the level of risk assumed.

An efficient set of portfolios is comprised of:

• a.

  only the minimum variance portfolio.

• b.

  only the maximum return portfolio.

• c.

  the portion of the opportunity set located below the minimum variance portfolio.

• d.

  a complete opportunity set.

• e.

  the dominant portion of the opportunity set.

As we add more diverse securities to a portfolio, the ____ risk of the portfolio will decrease while the _____ risk will not.

• a.

  systematic; unsystematic

• b.

  total; systematic

• c.

  total; unsystematic

• d.

  unsystematic; total

• e.

  systematic; total

If a stock portfolio is well diversified, then the portfolio variance:

• a.

  may be less than the variance of the least risky stock in the portfolio.

• b.

  must be equal to or greater than the variance of the least risky stock in the portfolio.

• c.

  will be a weighted average of the variances of the individual securities in the portfolio.

• 
  

  d.

  will equal the variance of the most volatile stock in the portfolio.

• e.

  will be an arithmetic average of the variances of the individual securities in the portfolio.

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

• a.

  move perfectly opposite to one another.

• b.

  are unrelated to one another.

• c.

  totally offset each other producing a rate of return of zero.

• d.

  have standard deviations of equal size but opposite signs.

• e.

  generally move in the same direction.