# ch07 - Chapter 7 PORTFOLIO THEORY Multiple Choice Questions...

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Chapter 7 PORTFOLIO THEORY Multiple Choice Questions Dealing With Uncertainty 1. With a continuous probability distribution,: a. a probability is assigned to each possible outcome. b. possible outcomes are constantly changing. c. an infinite number of possible outcomes exist. d. there is no variance. (c, moderate) 2. The expected value is the: a. inverse of the standard deviation b. correlation between a security’s risk and return. c. weighted average of all possible outcomes. d. same as the discrete probability distribution. (c, easy) 3. -------------------is concerned with the interrelationships between security returns. a. random diversification. b. correlating diversification c. Friedman diversification d. Markowitz diversification (d, moderate) 4. The one-period rate of return from a stock or bond which may or may not be realized can be described by using the term: a. holding-period return. b. yield. c. random variable d. market return. (c, easy) Chapter Seven Portfolio Theory 82

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5. Given the following probability distribution, calculate the expected return of security XYZ. Security XYZ's Potential return Probability 20% 0.3 30% 0.2 -40% 0.1 50% 0.1 10% 0.3 a. 16 percent Solution: b. 22 percent E(R) = Σ R i pr i c. 25 percent = (20)(0.3) + (30)(0.2) + (- 40)(0.1) + (50)(0.1) + d. 18 percent = (10)(0.3) = 22 percent (b, moderate) 6. Probability distributions: a. are always discrete. b. are always continuous. c. can be either discrete or continuous. d. are inverse to interest rates. (c, easy) 7. The most familiar distribution is the normal distribution which is: a. upward sloping. b. downward sloping. c. linear. d. bell-shaped. (d, easy) Portfolio Return and Risk 8. Portfolio weights are found by: a. dividing standard deviation by expected value. b. calculating the percentage each asset is to the total portfolio value. c. calculating the return of each asset to total portfolio return. d. dividing expected value by the standard deviation. (b, moderate) Chapter Seven Portfolio Theory 83
9. Which of the following statements regarding expected return of a portfolio is true? a. It can be higher than the weighted average expected return of individual assets. . b. It can be lower than the weighted average return of the individual assets. c. It can never be higher or lower than the weighted average expected return of individual assets. d. Expected return of a portfolio is impossible to calculate. (c, moderate) 10. In order to determine the expected return of a portfolio, all of the following must be known except: a. probabilities of expected returns of individual assets. b. weight of each individual asset to total portfolio value. c. expected return of each individual asset.

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## This note was uploaded on 08/29/2009 for the course BUS Invt taught by Professor Yost during the Spring '09 term at W. Florida.

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ch07 - Chapter 7 PORTFOLIO THEORY Multiple Choice Questions...

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