chp 11 Flashcards
Unsystematic risk
can be effectively eliminated through portfolio diversification.
Which one of the following measures the interrelationship between two securities?
Covariance
The correlation between stocks A and B is equal to the
covarianceAB divided by the product of the standard deviations of A and B.
The excess return earned by an asset that has a beta of one over that earned by a risk-free asset is referred to as the
market risk premium.
Hugo anticipates earning a rate of return of 13.2 percent on his portfolio next year. The 13.2 percent is referred to as the
expected return.
Assume the risk-free rate and the market risk premium are both positive. Trevor currently owns a portfolio consisting of risky and risk-free securities. The portfolio has an expected return of 11.2 percent, a standard deviation of 16.2 percent, and a beta of 1.21. He has decided that he would prefer a higher expected return. Which one of these actions should he take?
Increase the portfolio weight of the risky assets without affecting the total portfolio value
You plotted the monthly rate of return for two securities against time for the past 48 months. If the pattern of the movements of these two sets of returns rose and fell together the majority, but not all, of the time, then the securities have
a strong positive correlation.
The capital market line
intersects the vertical axis at the risk-free rate.
Well-diversified portfolios have negligible
unsystematic risks.
The standard deviation of a portfolio will tend to increase when
the portfolio concentration in a single cyclical industry increases.
Which one of the following would tend to indicate that a portfolio is being effectively diversified?
A decrease in the portfolio standard deviation
The equity risk premium for an individual security is computed by
multiplying the security’s beta by the market risk premium.
If there is no diversification benefit derived from combining two risky stocks into one portfolio, then the
returns on the two stocks must move perfectly in sync with one another.
A portfolio consists of five securities that have individual betas of 1.72, .67, 1.37, 1.53, and .49. You do not know the portfolio weight of each security. What do you know with certainty?
The portfolio beta will be less than 1.72 and greater than .49.
A negative covariance between the returns of Stock A and Stock B indicates that
the return on one stock will exceed that stock’s average return when the second stock has a return that is less than its average.
The portfolio with the lowest possible level of risk out of a set of portfolios consisting of two securities is referred to as the
minimum variance portfolio.
The systematic risk of the market is assigned a
beta of 1.
The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the
capital market line, which shows that investors will invest in a combination of the riskless asset and the tangency portfolio.
Well-diversified portfolios have negligible
unsystematic risks.
A stock with a beta of zero would be expected to have a rate of return equal to
the risk-free rate.
A stock with an actual return that lies above the security market line has
yielded a higher return than expected for the level of risk assumed.
Over time, the unexpected return on a company’s stock is expected to equal
zero.
Which one of the following statements is correct concerning the standard deviation of a portfolio?
The standard deviation of a portfolio could potentially be lowered by changing the weights of the securities in the portfolio.
The primary purpose of portfolio diversification is to
eliminate security-specific risk.
