1、Chapter 7 Optimal Risky Portfolios137Multiple Choice Questions1. Market risk is also referred to as A) systematic risk, diversifiable risk. B) systematic risk, nondiversifiable risk. C) unique risk, nondiversifiable risk. D) unique risk, diversifiable risk. E) none of the above. Answer: B Difficulty
2、: Easy Rationale: Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversificati
3、on.2. The risk that can be diversified away is A) firm specific risk. B) beta. C) systematic risk. D) market risk. E) none of the above. Answer: A Difficulty: Easy Rationale: See explanations for 1 and 2 above.3. The variance of a portfolio of risky securities A) is a weighted sum of the securities
4、variances. B) is the sum of the securities variances. C) is the weighted sum of the securities variances and covariances. D) is the sum of the securities covariances. E) none of the above. Answer: C Difficulty: Moderate Rationale: The variance of a portfolio of risky securities is a weighted sum tak
5、ing into account both the variance of the individual securities and the covariances between securities.Chapter 7 Optimal Risky Portfolios1384. The expected return of a portfolio of risky securities A) is a weighted average of the securities returns. B) is the sum of the securities returns. C) is the
6、 weighted sum of the securities variances and covariances. D) A and C. E) none of the above. Answer: A Difficulty: Easy 5. Other things equal, diversification is most effective when A) securities returns are uncorrelated. B) securities returns are positively correlated. C) securities returns are hig
7、h. D) securities returns are negatively correlated. E) B and C. Answer: D Difficulty: Moderate Rationale: Negative correlation among securities results in the greatest reduction of portfolio risk, which is the goal of diversification.6. The efficient frontier of risky assets is A) the portion of the
8、 investment opportunity set that lies above the global minimum variance portfolio. B) the portion of the investment opportunity set that represents the highest standard deviations. C) the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation. D) t
9、he set of portfolios that have zero standard deviation. E) both A and B are true. Answer: A Difficulty: Moderate Rationale: Portfolios on the efficient frontier are those providing the greatest expected return for a given amount of risk. Only those portfolios above the global minimum variance portfo
10、lio meet this criterion.Chapter 7 Optimal Risky Portfolios1397. The Capital Allocation Line provided by a risk-free security and N risky securities is A) the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. B) the line that connects the risk-fr
11、ee rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. C) the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. D) the horizontal line drawn from the risk-free rate. E) none of the above. Answer: C Dif
12、ficulty: Moderate Rationale: The Capital Allocation Line represents the most efficient combinations of the risk-free asset and risky securities. Only C meets that definition.8. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global mini
13、mum variance portfolio has a standard deviation that is always A) greater than zero. B) equal to zero. C) equal to the sum of the securities standard deviations. D) equal to -1. E) none of the above. Answer: B Difficulty: Difficult Rationale: If two securities were perfectly negatively correlated, t
14、he weights for the minimum variance portfolio for those securities could be calculated, and the standard deviation of the resulting portfolio would be zero.9. Which of the following statements is (are) true regarding the variance of a portfolio of two risky securities? A) The higher the coefficient
15、of correlation between securities, the greater the reduction in the portfolio variance. B) There is a linear relationship between the securities coefficient of correlation and the portfolio variance. C) The degree to which the portfolio variance is reduced depends on the degree of correlation betwee
16、n securities. D) A and B. E) A and C. Answer: C Difficulty: Moderate Rationale: The lower the correlation between the returns of the securities, the more portfolio risk is reduced.Chapter 7 Optimal Risky Portfolios14010. Efficient portfolios of N risky securities are portfolios that A) are formed wi
17、th the securities that have the highest rates of return regardless of their standard deviations. B) have the highest rates of return for a given level of risk. C) are selected from those securities with the lowest standard deviations regardless of their returns. D) have the highest risk and rates of
18、 return and the highest standard deviations. E) have the lowest standard deviations and the lowest rates of return. Answer: B Difficulty: Moderate Rationale: Portfolios that are efficient are those that provide the highest expected return for a given level of risk.11. Which of the following statemen
19、t(s) is (are) true regarding the selection of a portfolio from those that lie on the Capital Allocation Line? A) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. B) More risk-averse investors will invest le
20、ss in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. C) Investors choose the portfolio that maximizes their expected utility. D) A and C. E) B and C. Answer: E Difficulty: Moderate Rationale: All rational investors select the portfolio that maximizes
21、their expected utility; for investors who are relatively more risk-averse, doing so means investing less in the optimal risky portfolio and more in the risk-free asset.Use the following to answer questions 12-18:Consider the following probability distribution for stocks A and B:Chapter 7 Optimal Ris
22、ky Portfolios14112. The expected rates of return of stocks A and B are _ and _ , respectively. A) 13.2%; 9% B) 14%; 10% C) 13.2%; 7.7% D) 7.7%; 13.2% E) none of the above Answer: C Difficulty: Easy Rationale: E(RA) = 0.1(10%) + 0.2(13%) + 0.2(12%) + 0.3(14%) + 0.2(15%) = 13.2%; E(RB) = 0.1(8%) + 0.2
23、(7%) + 0.2(6%) + 0.3(9%) + 0.2(8%) = 7.7%.13. The standard deviations of stocks A and B are _ and _, respectively. A) 1.5%; 1.9% B) 2.5%; 1.1% C) 3.2%; 2.0% D) 1.5%; 1.1% E) none of the above Answer: D Difficulty: Moderate Rationale: sA = 0.1(10% - 13.2%)2 + 0.2(13% - 13.2%)2 + 0.2(12% - 13.2%)2 + 0
24、.3(14% - 13.2%)2 + 0.2(15% - 13.2%)21/2 = 1.5%; sB = 0.1(8% - 7.7%)2 + 0.2(7% - 7.7%)2 + 0.2(6% - 7.7%)2 + 0.3(9% - 7.7%)2 + 0.2(8% - 7.7%)2 = 1.1%.14. The coefficient of correlation between A and B is A) 0.47. B) 0.60. C) 0.58 D) 1.20. E) none of the above. Answer: A Difficulty: Difficult Rationale
25、: covA,B = 0.1(10% - 13.2%)(8% - 7.7%) + 0.2(13% - 13.2%)(7% - 7.7%) + 0.2(12% - 13.2%)(6% - 7.7%) + 0.3(14% - 13.2%)(9% - 7.7%) + 0.2(15% - 13.2%)(8% - 7.7%) = 0.76; rA,B = 0.76/(1.1)(1.5) = 0.47.Chapter 7 Optimal Risky Portfolios14215. If you invest 40% of your money in A and 60% in B, what would
26、be your portfolios expected rate of return and standard deviation? A) 9.9%; 3% B) 9.9%; 1.1% C) 11%; 1.1% D) 11%; 3% E) none of the above Answer: B Difficulty: Difficult Rationale: E(RP) = 0.4(13.2%) + 0.6(7.7%) = 9.9%; sP = (0.4)2(1.5)2 + (0.6)2(1.1)2 + 2(0.4)(0.6)(1.5)(1.1)(0.46)1/2 = 1.1%.16. Let
27、 G be the global minimum variance portfolio. The weights of A and B in G are _ and _, respectively. A) 0.40; 0.60 B) 0.66; 0.34 C) 0.34; 0.66 D) 0.76; 0.24 E) 0.24; 0.76 Answer: E Difficulty: Difficult Rationale: wA = (1.1)2 - (1.5)(1.1)(0.46)/(1.5)2 + (1.1)2 - (2)(1.5)(1.1)(0.46) = 0.23; wB = 1 - 0
28、.23 = 0.77.Note that the above solution assumes the solutions obtained in question 13 and 14.17. The expected rate of return and standard deviation of the global minimum variance portfolio, G, are _ and _, respectively. A) 10.07%; 1.05% B) 9.04%; 2.03% C) 10.07%; 3.01% D) 9.04%; 1.05% E) none of the
29、 above Answer: D Difficulty: Moderate Rationale: E(RG) = 0.23(13.2%) + 0.77(7.7%) = 8.97% . 9%; sG = (0.23)2(1.5)2 + (0.77)2(1.1)2 + (2)(0.23)(0.77)(1.5)(1.1)(0.46)1/2 = 1.05%.Chapter 7 Optimal Risky Portfolios14318. Which of the following portfolio(s) is (are) on the efficient frontier? A) The port
30、folio with 20 percent in A and 80 percent in B. B) The portfolio with 15 percent in A and 85 percent in B. C) The portfolio with 26 percent in A and 74 percent in B. D) The portfolio with 10 percent in A and 90 percent in B. E) A and B are both on the efficient frontier. Answer: C Difficulty: Diffic
31、ult Rationale: The Portfolios E(Rp), sp, Reward/volatility ratios are 20A/80B: 8.8%, 1.05%, 8.38; 15A/85B: 8.53%, 1.06%, 8.07; 26A/74B: 9.13%, 1.05%, 8.70; 10A/90B: 8.25%, 1.07%, 7.73. The portfolio with 26% in A and 74% in B dominates all of the other portfolios by the mean-variance criterion.Use t
32、he following to answer questions 19-21:Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. 19. The weights of A and B in the global mini
33、mum variance portfolio are _ and _, respectively. A) 0.24; 0.76 B) 0.50; 0.50 C) 0.57; 0.43 D) 0.43; 0.57 E) 0.76; 0.24 Answer: D Difficulty: Moderate Rationale: wA = 12 /(16 + 12) = 0.4286; wB = 1 - 0.4286 = 0.5714.20. The risk-free portfolio that can be formed with the two securities will earn _ r
34、ate of return. A) 8.5% B) 9.0% C) 8.9% D) 9.9% E) none of the above Answer: C Difficulty: Difficult Rationale: E(RP) = 0.43(10%) + 0.57(8%) = 8.86%.Chapter 7 Optimal Risky Portfolios14421. Which of the following portfolio(s) is (are) most efficient? A) 45 percent in A and 55 percent in B. B) 65 perc
35、ent in A and 35 percent in B. C) 35 percent in A and 65 percent in B. D) A and B are both efficient. E) A and C are both efficient. Answer: D Difficulty: Difficult Rationale: The Portfolio E(Rp), sp, and Reward/volatility ratios are 45A/55B: 8.9%, 0.6%, 14.83; 65A/35B: 9.3%, 6.2%, 1.5; 35A/65B: 8.7%
36、, 2.2%, 3.95. Both A and B are efficient according to the mean-variance criterion. A has a much higher Reward/volatility ratio.22. An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must: A) lend some of her money at the ri
37、sk-free rate and invest the remainder in the optimal risky portfolio. B) borrow some money at the risk-free rate and invest in the optimal risky portfolio. C) invest only in risky securities. D) such a portfolio cannot be formed. E) B and C Answer: E Difficulty: Moderate Rationale: The only way that
38、 an investor can create portfolios to the right of the Capital Allocation Line is to create a borrowing portfolio (buy stocks on margin). In this case, the investor will not hold any of the risk-free security, but will hold only risky securities.Chapter 7 Optimal Risky Portfolios14523. Which one of
39、the following portfolios cannot lie on the efficient frontier as described by Markowitz?A) Only portfolio W cannot lie on the efficient frontier. B) Only portfolio X cannot lie on the efficient frontier. C) Only portfolio Y cannot lie on the efficient frontier. D) Only portfolio Z cannot lie on the
40、efficient frontier. E) Cannot tell from the information given. Answer: A Difficulty: Moderate Rationale: When plotting the above portfolios, only W lies below the efficient frontier as described by Markowitz. It has a higher standard deviation than Z with a lower expected return.24. Which one of the
41、 following portfolios cannot lie on the efficient frontier as described by Markowitz?A) Only portfolio A cannot lie on the efficient frontier. B) Only portfolio B cannot lie on the efficient frontier. C) Only portfolio C cannot lie on the efficient frontier. D) Only portfolio D cannot lie on the eff
42、icient frontier. E) Cannot tell from the information given. Answer: D Difficulty: Moderate Rationale: When plotting the above portfolios, only W lies below the efficient frontier as described by Markowitz. It has a higher standard deviation than Z with a lower expected return.Chapter 7 Optimal Risky
43、 Portfolios14625. Portfolio theory as described by Markowitz is most concerned with: A) the elimination of systematic risk. B) the effect of diversification on portfolio risk. C) the identification of unsystematic risk. D) active portfolio management to enhance returns. E) none of the above. Answer:
44、 B Difficulty: Moderate Rationale: Markowitz was concerned with reducing portfolio risk by combining risky securities with differing return patterns.26. The measure of risk in a Markowitz efficient frontier is: A) specific risk. B) standard deviation of returns. C) reinvestment risk. D) beta. E) non
45、e of the above. Answer: B Difficulty: Moderate Rationale: Markowitz was interested in eliminating diversifiable risk (and thus lessening total risk) and thus was interested in decreasing the standard deviation of the returns of the portfolio.27. A statistic that measures how the returns of two risky
46、 assets move together is: A) variance. B) standard deviation. C) covariance. D) correlation. E) C and D. Answer: E Difficulty: Moderate Rationale: Covariance measures whether security returns move together or in opposition; however, only the sign, not the magnitude, of covariance may be interpreted. Correlation, which is covariance standardized by the product of the standard deviations of the two securities, may assume values only between +1 and -1; thus, both the sign and the magnitude may be interpreted regarding the movement of one securitys return relative to that of another security.
