Investment Management Exam 3

The reward-to-volatility ratio is given by the __________.

slope of the capital allocation line

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the __________.

capital allocation line

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________.

12.00%; 15.65

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you __________.

place 40% of your money in the risky portfolio and the rest in the risk-free asset

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately __________.

0.5

Asset A has an expected return of 21% and a standard deviation of 25%. The risk-free rate is 14%. What is the reward-to-variability ratio?

0.28

Based on the outcomes in the following table, choose which of the statements below is (are)  likely correct?

Scenario	Security A	Security B	Security C
Recession	Return > E(r)	Return = E(r)	Return < E(r)
Normal	Return = E(r)	Return = E(r)	Return = E(r)
Boom	Return < E(r)	Return = E(r)	Return > E(r)

1. The covariance of security A and security B is zero.

2. The correlation coefficient between securities A and C is negative.

3. The correlation coefficient between securities B and C is positive.

true, true, false

Decreasing the number of stocks in a portfolio from 50 to 10 would likely __________.

increase the unsystematic risk of the portfolio

Which of the following correlation coefficients will produce the least diversification benefit?

0.8

A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.

systematic risk

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always __________.

equal to 0

The __________ reward-to-variability ratio is found on the __________ capital market line.

highest, steepest

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is __________.

5%

The optimal risky portfolio can be identified by finding:

1. The minimum-variance point on the efficient frontier

2. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier

3. The tangency point of the capital market line and the efficient frontier

4. The line with the steepest slope that connects the risk-free rate to the efficient frontier

3 and 4 only

The standard deviation of return on investment A is 10%, while the standard deviation of return on investment B is 5%. If the covariance of returns on A and B is 0.0030, the correlation coefficient between the returns on A and B is __________.

0.6

Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is __________.

40%

Beta is a measure of security responsiveness to __________.

market risk

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the __________.

correlation coefficient between ACE and the market has risen

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of __________blank.

-1

Stocks with a beta of zero offer an expected rate of return of zero

The CAPM implies that investors require a higher return to hold highly volatile securities

You can construct a portfolio with a beta of 0.75 by investing 0.75 of the investment budget in T-bills and the remainder in the market portfolio

false

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

21.60%

According to the CAPM, what is the market risk premium given an expected return on a security of 16.0%, a stock beta of 1.6, and a risk-free interest rate of 8%?

5%

According to the capital asset pricing model, a security with a __________

positive alpha is considered underpriced

According to the capital asset pricing model, a fairly priced security will plot __________

on the security market line

Kaskin, Incorporated, stock has a beta of 1.2 and Quinn, Incorporated, stock has a beta of 0.6. Which of the following statements is most accurate?

The equilibrium expected rate of return is higher for Kaskin than for Quinn.

You have a $47,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,400 in Intel, $10,800 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and 0.8, respectively. What is your portfolio beta?

1.063

You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.10, rf is 0.06 and E(rm) = 0.16. What is the stock's abnormal return?

1%

If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index?

1