Chp2-8 Study Guide

# Chp2-8 Study Guide - 22. The variance of a portfolio of...

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22. The variance of a portfolio of risky securities is __________. A. The sum of the securities' covariances B. The sum of the securities' variances C. The weighted sum of the securities' covariances D. The weighted sum of the securities' variances 23. The measure of risk used in the Capital Asset Pricing Model is ____________. A. Specific risk B. The standard deviation of returns C. Reinvestment risk D. Beta 24. According to Markowitz and other proponents of modern portfolio theory which of the following activities would not be expected to produce any benefits? A. Diversification B. Investing in Treasury bills C. Investing in stocks of utility companies D. Engaging in active portfolio management to enhance returns 25. Reward-to-variability ratios are ________ on the capital market line than (as) on the efficient frontier. A. Lower B. Higher C. The same D. Indeterminate

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26. The optimal risky portfolio can be identified by finding _____________. I. the minimum variance point on the efficient frontier II. the maximum return point on the efficient frontier the minimum variance point on the efficient frontier III. the tangency point of the capital market line and the efficient frontier IV. the line with the steepest slope that connects the risk free rate to the efficient frontier A. I and II only B. II and III only C. III and IV only D. I and IV only
Use the following to answer questions 27-29: 27. What is the beta of this stock. A. 0.12 B. 0.35 C. 1.32 D. 4.05 28. State the characteristic line for this stock: Rstock = ___ + ___ Rmarket. A. 0.35, 0.12 B. 4.05, 1.32 C. 15.44, 0.97 D. 0.26, 1.36 29. What percent of the variance is explained by this regression A. 12 B. 35 C. 4.05 D. 80

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30. As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that I. the average risk per year may be smaller over longer investment horizons II. the variance of the total rate of return on your investment will be larger III. your overall risk on the investment will fall A. I only B. I and II only C. III only D. I, II and III 31. The ________ is equal to the square root of the systematic variance divided by the total variance. A. Covariance B. Correlation coefficient C. Standard deviation D. Reward-to-variability ratio 32. Which of the following statements is true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the one-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk. A. I only B. II only C. II and III only D. I, II and III E. None of the statements are correct 33. If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the A. Stock's standard deviation B. Variance of the market C. Stock's beta D. Covariance with the market index
34. Semitool Corp has an expected excess return of 5% for next year. However for every

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## This note was uploaded on 05/12/2011 for the course FIN 300 taught by Professor Wang during the Spring '11 term at UChicago.

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Chp2-8 Study Guide - 22. The variance of a portfolio of...

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