Review of Lecture 22 Quiz and Test Questions
1. ER3 The expected rate of return on common stock for company X equals 8.5%. For
Company Y, the expected rate of return is 22.6%. You wish to form a portfolio by
allocating some of your funds in Company X and the remainder in Company Y. In order to
form a portfolio whose expected return equals 19.90%, what proportion of funds should
be invested in Company X?
a. 28.0%
b. 25.5%
c. 19.1%
d. 23.2%
e. 21.1%
2. TR11 You form a portfolio by combining shares of stocks for two different companies. The
companies have different expected returns, and different risks. Which statement is true
for all of the possible portfolios that contain shares in both companies? (NOTE: Choices
below might be incorrect because they always are false, whereas others might be
incorrect because they are sometimes true and sometimes false. Only the correct choice
is always true.)?
a. The risk for the portfolio lies between the risks of the component stocks.
b. The risk of the portfolio is greater than the risk of the least risky stock.
c. The return for the portfolio is less than the return of the highest return stock.
d. The risk for the portfolio is less than the risk of the least risky stock.
e. The return for the portfolio is less than the return of the lowest return stock.
3. MR1f Find the combination of Alpha and Zed that yield the minimum risk portfolio given
that each of the paired-outcomes is equally likely:
Outcome 1: RORAlpha = -1.4% and RORZed = 20.1%.
Outcome 2: RORAlpha = 7.1% and RORZed = 13.8%.
Outcome 3: RORAlpha = 22.1% and RORZed = 10.8%.
Outcome 4: RORAlpha = 12.5% and RORZed = -5.4%.
What is the standard deviation of returns for this minimum risk portfolio and how much
diversification benefit ("DB"), measured as risk reduction in basis points ("BP"), does the
portfolio offer?
a. the standard deviation is 4.5% and the DB is 382 BP
b. the standard deviation is 4.0% and the DB is 382 BP
c. the standard deviation is 5.2% and the DB is 439 BP
d. the standard deviation is 4.5% and the DB is 439 BP
e. the standard deviation is 4.0% and the DB is 439 BP
4. ER7 The standard deviation of returns equals 9.5% for stock X and 8.0% for stock Z. The
correlation between the two stocks equals -0.50. You make a portfolio that allocates 65%
of funds to stock X. The remainder is put in stock Z. Which statement correctly describes
the risk of the resultant portfolio?
a. The portfolio standard deviation is 4.7% and represents diversification benefits of
362 basis points relative to average component risk
b. The portfolio standard deviation is 5.4% and represents diversification benefits of
362 basis points relative to average component risk
c. The portfolio standard deviation is 4.7% and represents diversification benefits of
315 basis points relative to average component risk
d. The portfolio standard deviation is 6.2% and represents diversification benefits of
362 basis points relative to average component risk
e. The portfolio standard deviation is 5.4% and represents diversification benefits of
315 basis points relative to average component risk
5. MR7 Throughout the past, the return for type X stocks has averaged 9.7% and the
standard deviation has been 33.7%. For type Y stocks the return has averaged 7.0% and
the standard deviation 44.1%. The correlation between the returns for these two assets
has been -0.09. You expect these tendencies to persist into the future. For the minimum
risk portfolio comprising X and Y what is the allocation and average portfolio risk?
a. The minimum risk portfolio allocates 62.1% to X; average component risk is
37.7%.
b. The minimum risk portfolio allocates 62.1% to X; average component risk is
32.7%.
c. The minimum risk portfolio allocates 62.1% to X; average component risk is
28.5%.
d. The minimum risk portfolio allocates 54.0% to X; average component risk is
37.7%.
e. The minimum risk portfolio allocates 54.0% to X; average component risk is
28.5%.
6. ER8b Investment risk, as measured by the standard deviation of returns, equals 16.4%
for stock X and 23.9% for stock Y. The correlation between the securities is zero. You
form a portfolio allocated 65% in X and 35% in Y. Find the diversification benefit,
measured as percent reduction in risk, for the portfolio.
a. 5.0%
b. 5.5%
c. 6.6%
d. 6.0%
e. 4.5%
7. MR4a The standard deviation of expected returns for investments X and Y equal 14.5%
and 8.0%, respectively. The correlation between returns for X and Y is -0.10. How much
risk reduction, that is diversification benefit in basis points, does the minimum risk
portfolio provide?
a. 296
b. 358
c. 394
d. 269
e. 326
8. MR1d Find the combination of Alpha and Zed that yield the minimum risk portfolio given
that each of the paired-outcomes is equally likely:
Outcome 1: RORAlpha = -1.2% and RORZed = 18.0%.
Outcome 2: RORAlpha = 6.1% and RORZed = 24.0%.
Outcome 3: RORAlpha = 20.3% and RORZed = 9.9%.
Outcome 4: RORAlpha = 13.9% and RORZed = 4.8%.
Which statement about the minimum risk portfolio is most accurate?
a. the expected return is 12.1% and the standard deviation is 2.7%
b. the expected return is 9.1% and the standard deviation is 2.7%
c. the expected return is 10.5% and the standard deviation is 3.1%
d. the expected return is 10.5% and the standard deviation is 2.7%
e. the expected return is 12.1% and the standard deviation is 3.1%