Chapter 17

Question 1

If the return on one security always increases by 1 percentage point for every 2.5 percentage point decrease in the other. Therefore, these two securities have a correlation of

Answer 1

-1

Question 2

If the return on one security always increases by 1.5 percentage points for a 1 percentage point increase in
another security’s return, the two securities have a correlation of

Answer 2

+1

Question 3

The currency the company uses in its financial statements.

Answer 3

reporting currency

Question 4

It measures the strength of the relationship between the returns of two securities.

Answer 4

correlation coefficient

Question 5

The portion of an asset’s total risk that is unrelated to fluctuations in the market.

Answer 5

unsystematic risk

Question 6

It provides the maximum expected return for a given level of risk; or, alternatively, the minimum risk for a given expected return.

Answer 6

efficient portfolio

Question 7

A measure of the extent to which the return on an investment varies from the expected return.

Answer 7

standard deviation

Question 8

It represents the risk-return trade-off between stocks and bonds given their expected returns, standard deviations, and correlation.

Answer 8

portfolio opportunity set

Question 9

A measure of the sensitivity of an asset’s return to the return on the market portfolio.

Answer 9

Beta

Question 10

This measure is the square of the correlation coefficient between the return on a security or portfolio and the return on the market index.

Answer 10

R-Squared

Question 11

It is the set of portfolios with the lowest possible risk for a given level of expected return.

Answer 11

Minimum variance frontier

Question 12

The upper part of the minimum variance frontier.

Answer 12

efficient frontier

Question 13

Managed Products include…

Answer 13

Mutual funds, hedge funds, and ETFs

Question 14

the benchmark asset mix designed to achieve a client’s long-term goals and objectives.

Answer 14

Strategic asset allocation

Question 15

What is the purpose of tactical asset allocation?

Answer 15

To take advantage of short-term opportunities created in the markets.

Question 16

If an advisor wants to reduce risk in a client’s portfolio, the best way is to find a security with return movements in perfect linear opposition to the existing security, with a correlation of….

Answer 16

-1

Question 17

measures how accurately beta describes the relationship between the return on the portfolio and the return on the market index.

Answer 17

Coefficient of determination (R-squared).