QCHAPTER 7

QCHAPTER 7 - Chapter 7 PORTFOLIO THEORY Multiple Choice...

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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. 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. 3. -------------------is concerned with the interrelationships between security returns. a. random diversification. b. correlating diversification c. Friedman diversification d. Markowitz diversification 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. 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: Chapter Seven Portfolio Theory 82

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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 6. Probability distributions: a. are always discrete. b. are always continuous. c. can be either discrete or continuous. d. are inverse to interest rates. 7. The most familiar distribution is the normal distribution which is: a. upward sloping. b. downward sloping. c. linear. d. bell-shaped. 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. 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.
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This note was uploaded on 02/13/2012 for the course FINA 3480 taught by Professor Moore during the Fall '11 term at Toledo.

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QCHAPTER 7 - Chapter 7 PORTFOLIO THEORY Multiple Choice...

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