SME_8e_Ch_07_Section_3

# SME_8e_Ch_07_Section_3 - CHAPTER 7 SECTION 3 RANDOM...

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1 CHAPTER 7 SECTION 3: RANDOM VARIABLES AND DISCRETE PROBABILITY DISTRIBUTIONS MULTIPLE CHOICE 144. The portfolio expected return of two investments: a. will be higher when the covariance is zero. b. will be higher when the covariance is negative. c. will be higher when the covariance is positive. d. does not depend on the covariance. ANS: D PTS: 1 REF: SECTION 7.3 145. The following information regarding a portfolio of two stocks are given: w 1 = .65, w 2 = .35, E ( R 1 ) = .12, and E ( R 2 ) = .14. Which of the following regarding the portfolio expected return, E ( R p ), is correct? a. .260 b. .127 c. .346 d. .374 ANS: B PTS: 1 REF: SECTION 7.3 146. The following information regarding a portfolio of two stocks are given: w 1 = .25, w 2 = .75, E ( R 1 ) = .08, and E ( R 2 ) = .15. Which of the following regarding the portfolio expected return, E ( R p ), is correct? a. .3640 b. .2300 c. .1325 d. .1699 ANS: C PTS: 1 REF: SECTION 7.3 147. Which of the following regarding the mean and variance of a portfolio of two stocks is false? a. E ( R p ) = ( w 1 + w 2 )[ E ( R 1 ) + E ( R 2 )] b. V ( R p ) = w 1 2 V ( R 1 ) + w 2 2 V ( R 2 ) + 2 w 1 w 2 COV( R 1 R 2 ) c. V ( R p ) = w 1 2 σ 1 2 + w 2 2 2 2 + 2 w 1 w 2 ρσ 1 2 d. E ( R p ) = w 1 E ( R 1 ) + w 2 E ( R 2 ) ANS: A PTS: 1 REF: SECTION 7.3

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2 148. Which of the following regarding the mean and variance of a portfolio of K stocks is false? a. E ( R p ) = w i E ( R i ) i = 1 K b. V ( R p ) = w i 2 V ( R i ) + COV ( R i , R j ) j = i + 1 K i = 1 K i = 1 K c. V ( R p ) = w i 2 σ i 2 + w i w j COV ( R i R j ) j = i + 1 K i = 1 K i = 1 K d. None of these choices. ANS: B PTS: 1 REF: SECTION 7.3 TRUE/FALSE 149. The covariance between two investments of a portfolio is equal to the sum of the variances of the investments. ANS: F PTS: 1 REF: SECTION 7.3 150. If the covariance between two investments of a portfolio is zero, the variance of the portfolio will be equal to the sum of the variances of the investments. ANS: T PTS: 1 REF: SECTION 7.3 151. The expected return of a portfolio of two investments will be equal to the sum of the expected returns of the two investments plus twice the covariance between the investments. ANS: F
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SME_8e_Ch_07_Section_3 - CHAPTER 7 SECTION 3 RANDOM...

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