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Unformatted text preview: wo returns. C) Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio. D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together. Answer: B
Explanation: A) B) C) D) 5) Which of the following statements is false? A) Dividing the covariance by the volatilities ensures that correlation is always between 1 and +1. B) Volatility is the square root of variance. C) The closer the correlation is to 0, the more the returns tend to move together as a result of common risk. D) If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive. Answer: C
Explanation: A) B) C) The closer the correlation is to 1, the more the returns tend to move together as a result of common risk. D) 6) Which of the following statements is false? A) A stockʹs return is perfectly positively correlated with itself. B) When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. C) The closer the correlation is to 1, the more the returns tend to move in opposite directions. D) The variance of a portfolio depends only on the variance of the individual stocks. Answer: D
Explanation: A) B) C) D) The variance of a portfolio depends on the variance and correlations of the individual stocks. 7) Which of the following equations is incorrect? A) 1
Cov(Ri,Rj) = Σ(Ri  Ri)(Rj  Rj) T −1
B) Var(Rp) = x12Var(R1) + x22Var(R2) + 2X1X2Cov(R1,R2) C) Corr(Ri,Rj) = Cov( Ri, Rj )
Var ( Ri )Var ( Rj ) D) Cov(Ri,Rj) = E[(Ri  E[Ri])(Rj  E[Rj])] Answer: C
Explanation: A) B) C) Cov( Ri, Rj )
Corr(Ri,Rj) = SD( Ri ) SD( Rj )
D) Use the table for the question(s) below. Consider the following returns: Lowes Home Depot IBM
Realized Realized Realized Year End
Return
Return
Return 2000
20.1%
14.6%
0.2% 2001
72.7%
4.3%
3.2% 2002
25.7%
58.1%
27.0% 2003
56.9%
71.1%...
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This document was uploaded on 02/02/2014.
 Fall '14

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