Sample Questions for Midterm 2
1- An impending recession is an example of:
a. interest rate risk.
b. inflation risk.
c. market risk.
d. financial risk.
2- Political stability is the major factor concerning:
a. exchange risk.
b. systematic risk.
c. nonsystematic risk.
d. country risk.
3- The best return measure to use if you are trying to measure the total effect of returns
over time given some stated beginning amount is the:
a. total return.
b. return relative.
c. cumulative wealth index.
d. total yield.
4- Random diversification helps to:
a. eliminate total risk.
b. eliminate systematic risk.
c. minimize risk specific to a security.
d. maximize return.
5- The equity risk premium is the difference between:
a. stocks and bonds.
b. high-grade stocks and low-grade stocks.
c. stocks and the risk-free rate.
d. a stock market index and the inflation rate.
6- The standard deviation measures:
a. systematic risk of a security.
b. unsystematic risk of a security.
c. total risk of a security.
d. the equity risk premium.
7- New environmental regulations affecting the lumber industry is a type of:
a. market risk.
b. financial risk.
c. business risk.
d. liquidity risk.
8- The expected value is the:
a. inverse of the standard deviation.
b. correlation between a security’s risk and return.
c. weighted average of all possible outcomes.
d. same as the discrete probability distribution.
9- ___________ is concerned with the interrelationships between security returns.
a. Random diversification
b. Correlating diversification
c. Friedman diversification
d. Markowitz diversification
10- The range of the correlation coefficient is from:
a. 0 to +1.0
b. 0 to +2.0
c. –1.0 to 0
d. –1.0 to +1.0
11- Security A and Security B have a correlation coefficient of 0. If Security A’s return
is expected to increase by 10 per cent,
a. Security B’s return should also increase by 10 per cent.
b. Security B’s return should decrease by 10 per cent.
c. Security B’s return should be zero.
d. Security B’s return is impossible to determine from the information given.
12- Which of the following portfolios has the least reduction of risk?
a. A portfolio with securities all having positive correlation with each other.
b. A portfolio with securities all having zero correlation with each other.
c. A portfolio with securities all having negative correlation with each other.
d. A portfolio with securities all having skewed correlation with each other.
13- The major problem with the Markowitz model is its:
a. lack of accuracy.
b. predictability flaws.
c. complexity.
d. inability to handle a large number of inputs.
14- A change in the correlation coefficient of the returns of two securities in a portfolio
causes a change in:
a. both the expected return and the risk of the portfolio.
b. only the expected return of the portfolio.
c. only the risk level of the portfolio.
d. neither the expected return nor the risk level of the portfolio.
15- Which of the following statements regarding correlations among domestic stocks is
true?
a. Correlation is generally positive.
b. Correlation is generally negative.
c. Correlation is generally zero.
d. Correlation is generally unstable.
16- According to Markowitz’s mean-variance model, the variance of a portfolio is
equal to the weighted:
a. average of the individual variances.
b. covariances between all unique pairs of securities.
c. variances plus the weighted covariances of all pairs of securities.
d. covariances plus the weighted betas of the securities.
17- Which of the following statements regarding indifference curves is not true?
a. Investors have a finite number of indifference curves.
b. The greater the slope of the indifference curve, the greater the risk aversion of
investors.
c. The indifference curves for all risk-averse investors will be upward sloping.
d. Indifference curves cannot intersect.
18- According to Markowitz, an efficient portfolio is one that has the:
a. largest expected return for the smallest level of risk.
b. largest expected return and zero risk.
c. largest expected return for a given level of risk.
d. smallest level of risk.
19- A portfolio which lies below the efficient frontier is described as:
a. optimal.
b. unattainable.
c. dominant.
d. inferior.
20- The separation theorem states that:
a. systematic risk is separate from unsystematic risk.
b. the investment decision is separate from the financing decision.
c. the individual security risk is separate from portfolio risk.
d. borrowing portfolios are separate from lending portfolios.
21- An example of risk-free lending would be:
a. keeping currency in a wall safe.
b. purchasing AAA corporate bonds.
c. purchasing T-bills.
d. getting a margin loan from a stock broker.
22- Recent Canadian research suggests that a well-diversified portfolio contains at
least:
a. 10 stocks.
b. 20 stocks.
c. 70 stocks.
d. 100 stocks.
23- Portfolios having the smallest portfolio risk at some level of expected return or
having the highest expected return at some level of risk are called:
a. risk-free portfolios.
b. high-return portfolios.
c. dominated portfolios.
d. efficient portfolios.