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An analyst gathers the following data about the returns for two stocks. Stock A, Stock B: E(R): 0.04, 0.09 σ²: 0.0025, 0.0064 Cov (A,B) = 0.001 The correlation between the returns of Stock A and Stock B is closest to:

0.63

0.25 (correct)

0.50

Over long periods of time, compared to fixed income securities, equities have tended to exhibit:

higher average annual returns and higher standard deviation of returns. (correct)

lower average annual returns and higher standard deviation of returns.

higher average annual returns and lower standard deviation of returns.

Historically, which of the following asset classes has exhibited the smallest standard deviation of monthly returns?

Long-term corporate bonds.

Large-capitalization stocks.

Treasury bills. (correct)

Over the long term, the annual returns and standard deviations of returns for major asset classes have shown:

a positive relationship. (C) Signup and view all the answers

A line that represents the possible portfolios that combine a risky asset and a risk free asset is most accurately described as a:

capital allocation line. (A) Signup and view all the answers

Which of the following statements about the efficient frontier is least accurate?

Investors will want to invest in the portfolio on the efficient frontier that offers the highest rate of return. (B) Signup and view all the answers

The optimal portfolio in the Markowitz framework occurs when an investor achieves the diversified portfolio with the:

highest utility. (A) Signup and view all the answers

Which of the following statements about the optimal portfolio is NOT correct? The optimal portfolio:

is the portfolio that gives the investor the maximum level of return. (A) Signup and view all the answers

The basic premise of the risk-return trade-off suggests that risk-averse individuals purchasing investments with higher non-diversifiable risk should expect to earn:

higher rates of return. (B) Signup and view all the answers

Investors who are less risk averse will have what type of indifference curves for risk and expected return?

Flatter. (B) Signup and view all the answers

Smith has more steeply sloped risk-return indifference curves than Jones. Assuming these investors have the same expectations, which of the following best describes their risk preferences and the characteristics of their optimal portfolios? Smith is:

more risk averse than Jones and will choose an optimal portfolio with a lower expected return. (C) Signup and view all the answers

The particular portfolio on the efficient frontier that best suits an individual investor is determined by:

the individual's utility curve. (B) Signup and view all the answers

According to Markowitz, an investor's optimal portfolio is determined where the:

investor's highest utility curve is tangent to the efficient frontier. (B) Signup and view all the answers

Becky Scott and Sid Fiona have the same expectations about the risk and return of the market portfolio; however, Scott selects a portfolio with 30% T-bills and 70% invested in the market portfolio, while Fiona holds a leveraged portfolio, having borrowed to invest 130% of his portfolio equity value in the market portfolio. Regarding their preferences between risk and return and their indifference curves, it is most likely that:

Fiona's indifference curves are flatter than Scott's. (B) Signup and view all the answers

A risk-averse investor choosing from these portfolios could rationally select:

Jones or Lewis, but not Kelly. (C) Signup and view all the answers

Risk aversion means that an individual will choose the less risky of two assets:

if they have the same expected return. (A) Signup and view all the answers

Which of the following statements about the above graph is least accurate?

Investor X is less risk-averse than Investor Y. (B) Signup and view all the answers

A stock has an expected return of 4% with a standard deviation of returns of 6%. A bond has an expected return of 4% with a standard deviation of 7%. An investor who prefers to invest in the stock rather than the bond is best described as:

risk seeking. (B) Signup and view all the answers

The variance of the portfolio is closest to:

0.25 (C) Signup and view all the answers

Using the following correlation matrix, which two stocks would combine to make the lowest-risk portfolio? (Assume the stocks have equal risk and returns.)

Stock = A A = +1 B = -0.2 C = +0.6 Signup and view all the answers

If the standard deviation of returns for stock A is 0.40 and for stock B is 0.30 and the covariance between the returns of the two stocks is 0.007 what is the correlation between stocks A and B?

0.0583 Signup and view all the answers

Two assets are perfectly positively correlated. If 30% of an investor's funds were put in the asset with a standard deviation of 0.3 and 70% were invested in an asset with a standard deviation of 0.4, what is the standard deviation of the portfolio?

0.370 Signup and view all the answers

Which of the following statements regarding the covariance of rates of return is least accurate?

If the covariance is negative, the rates of return on two investments will always move in different directions relative to their means. (B) Signup and view all the answers

What is the variance and standard deviation of the two stock portfolio?

Variance = 0.03836; Standard Deviation = 19.59%. (C) Signup and view all the answers

If the standard deviation of stock A is 10.6%, the standard deviation of stock B is 14.6%, and the covariance between the two is 0.015476, what is the correlation coefficient?

1 Signup and view all the answers

What is the variance of a two-stock portfolio if 15% is invested in stock A (variance of 0.0071) and 85% in stock B (variance of 0.0008) and the correlation coefficient between the stocks is 0.04?

0.0007 Signup and view all the answers

The correlation coefficient between stocks A and B is 0.75. The standard deviation of stock As returns is 16% and the standard deviation of stock Bs returns is 22%. What is the covariance between stock A and B?

0.0352 Signup and view all the answers

Calculating the variance of a two-asset portfolio least likely requires inputs for each asset's:

beta. (B) Signup and view all the answers

The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.1 and the standard deviation of the stock's returns is 0.2. What is the correlation coefficient between the stock and market returns?

0.40 Signup and view all the answers

What is the covariance for this portfolio?

6 Signup and view all the answers

An investor's portfolio currently has an expected return of 11% with a variance of 0.0081. She is considering replacing 20% of the portfolio with a security that has an expected return of 12% and a standard deviation of 0.07. If the covariance between the returns on the existing portfolio and the returns on the added security is 0.0058, the variance of returns on the new portfolio will be closest to:

0.00724 (A) Signup and view all the answers

The portfolio's standard deviation is closest to:

0.1600 (B) Signup and view all the answers

If the standard deviation of asset A is 12.2%, the standard deviation of asset B is 8.9%, and the correlation coefficient is 0.20, what is the covariance between A and B?

0.0022 Signup and view all the answers

If the variance of Bond 1 increases to 0.026 while the variance of Bond 2 decreases to 0.188 and the covariance remains the same, the correlation between the two bonds will:

decrease. (A) Signup and view all the answers

If two stocks have positive covariance:

their rates of return tend to change in the same direction. (C) Signup and view all the answers

The standard deviation of returns for the overall portfolio is closest to:

14.45% (A) Signup and view all the answers

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An analyst gathers the following data about the returns for two stocks. Stock A, Stock B: E(R): 0.04, 0.09 σ2: 0.0025, 0.0064 Cov (A,B) = 0.001 The correlation between the returns of Stock A and Stock B is closest to:

Over long periods of time, compared to fixed income securities, equities have tended to exhibit:

Historically, which of the following asset classes has exhibited the smallest standard deviation of monthly returns?

Over the long term, the annual returns and standard deviations of returns for major asset classes have shown:

A line that represents the possible portfolios that combine a risky asset and a risk free asset is most accurately described as a:

Which of the following statements about the efficient frontier is least accurate?

The optimal portfolio in the Markowitz framework occurs when an investor achieves the diversified portfolio with the:

Which of the following statements about the optimal portfolio is NOT correct? The optimal portfolio:

The basic premise of the risk-return trade-off suggests that risk-averse individuals purchasing investments with higher non-diversifiable risk should expect to earn:

Investors who are less risk averse will have what type of indifference curves for risk and expected return?

Smith has more steeply sloped risk-return indifference curves than Jones. Assuming these investors have the same expectations, which of the following best describes their risk preferences and the characteristics of their optimal portfolios? Smith is:

The particular portfolio on the efficient frontier that best suits an individual investor is determined by:

According to Markowitz, an investor's optimal portfolio is determined where the:

A risk-averse investor choosing from these portfolios could rationally select:

Risk aversion means that an individual will choose the less risky of two assets:

Which of the following statements about the above graph is least accurate?

A stock has an expected return of 4% with a standard deviation of returns of 6%. A bond has an expected return of 4% with a standard deviation of 7%. An investor who prefers to invest in the stock rather than the bond is best described as:

The variance of the portfolio is closest to:

Using the following correlation matrix, which two stocks would combine to make the lowest-risk portfolio? (Assume the stocks have equal risk and returns.)

If the standard deviation of returns for stock A is 0.40 and for stock B is 0.30 and the covariance between the returns of the two stocks is 0.007 what is the correlation between stocks A and B?

Two assets are perfectly positively correlated. If 30% of an investor's funds were put in the asset with a standard deviation of 0.3 and 70% were invested in an asset with a standard deviation of 0.4, what is the standard deviation of the portfolio?

Which of the following statements regarding the covariance of rates of return is least accurate?

What is the variance and standard deviation of the two stock portfolio?

If the standard deviation of stock A is 10.6%, the standard deviation of stock B is 14.6%, and the covariance between the two is 0.015476, what is the correlation coefficient?

What is the variance of a two-stock portfolio if 15% is invested in stock A (variance of 0.0071) and 85% in stock B (variance of 0.0008) and the correlation coefficient between the stocks is 0.04?

The correlation coefficient between stocks A and B is 0.75. The standard deviation of stock As returns is 16% and the standard deviation of stock Bs returns is 22%. What is the covariance between stock A and B?

Calculating the variance of a two-asset portfolio least likely requires inputs for each asset's:

The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.1 and the standard deviation of the stock's returns is 0.2. What is the correlation coefficient between the stock and market returns?

What is the covariance for this portfolio?

The portfolio's standard deviation is closest to:

If the standard deviation of asset A is 12.2%, the standard deviation of asset B is 8.9%, and the correlation coefficient is 0.20, what is the covariance between A and B?

If the variance of Bond 1 increases to 0.026 while the variance of Bond 2 decreases to 0.188 and the covariance remains the same, the correlation between the two bonds will:

If two stocks have positive covariance:

The standard deviation of returns for the overall portfolio is closest to:

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An analyst gathers the following data about the returns for two stocks. Stock A, Stock B: E(R): 0.04, 0.09 σ²: 0.0025, 0.0064 Cov (A,B) = 0.001 The correlation between the returns of Stock A and Stock B is closest to: