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Chapter 7-Study Guide

# Chapter 7-Study Guide - Chapter 7 PORTFOLIO THEORY Multiple...

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Chapter 7 PORTFOLIO THEORY Multiple Choice Questions 1. 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) 2. 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) 3. Probability distributions: a. are always discrete. b. are always continuous. c. can be either discrete or continuous. d. are inverse to interest rates. (c) 4. The most familiar distribution is the normal distribution which is: Chapter Seven Portfolio Theory 82

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(d, easy) 5. Portfolio weights are found by: (b) 6. Which of the following is true regarding the expected return of a portfolio? (c) 7. Company specific risk is also known as: a. market risk. b. systematic risk. c. non-diversifiable risk. d. idiosyncratic risk. (d) 8. The relevant risk for a well-diversified portfolio is: 9. Which of the following statements regarding the correlation coefficient is not true? (c) Chapter Seven Portfolio Theory 83

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Chapter 7-Study Guide - Chapter 7 PORTFOLIO THEORY Multiple...

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