This paperwork of BUS 405 Week 4 Chapter 11 Diversification and Risky Asset Allocation consists of the next questions:

1. Which one of the following returns is the average return you expect to earn in the future on a risky asset?

2. What is the extra compensation paid to an investor who invests in a risky asset rather than in a riskfree asset called?

3. A group of stocks and bonds held by an investor is called which one of the following?

4. The value of an individual security divided by the portfolio value is referred to as the portfolio:

5. Diversification is investing in a variety of assets with which one of the following as the primary goal?

6. Correlation is the:

7. The division of a portfolio’s dollars among various types of assets is referred to as:

8. Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?

9. An efficient portfolio is a portfolio that does which one of the following?

10. Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?

11. Which of the following are affected by the probability of a state of the economy occurring?

I. expected return of an individual security

II. expected return of a portfolio

III. standard deviation of an individual security

IV. standard deviation of a portfolio

12. Which one of the following statements must be true?

13. You own a portfolio of 5 stocks and have 3 expected states of the economy. You have twice as much invested in Stock A as you do in Stock E. How will the weights be determined when you compute the rate of return for each economic state?

14. Terry has a portfolio comprised of two individual securities. Which one of the following computations that he might do is NOT a weighted average?

15. You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy. If the probability of a booming economy decreases, your expected return will:

16. You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct?

17. Which of the following will increase the expected risk premium for a security, all else constant?

I. an increase in the security’s expected return

II. a decrease in the security’s expected return

III. an increase in the risk-free rate

IV. a decrease in the risk-free rate

18. If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:

19. You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?

20. Which of the following affect the expected rate of return for a portfolio?

21. You own a portfolio comprised of 4 stocks and the economy has 3 possible states. Assume you invest your portfolio in a manner that results in an expected rate of return of 7.5 percent, regardless of the economic state. Given this, what must be value of the portfolio’s variance be?

22. As the number of individual stocks in a portfolio increases, the portfolio standard deviation:

23. Which one of the following is eliminated, or at least greatly reduced, by increasing the number of individual securities held in a portfolio?

24. Non-diversifiable risk:

25. Which one of the following correlation coefficients can provide the greatest diversification benefit?

26. To reduce risk as much as possible, you should combine assets which have which one of the following correlation relationships?

27. What is the correlation coefficient of two assets that are uncorrelated?

28. How will the returns on two assets react if those returns have a perfect positive correlation?

I. move in the same direction

II. move in opposite directions

III. move by the same amount

IV. move by either equal or unequal amounts

29. If two assets have a zero correlation, their returns will:

30. Which one of the following correlation relationships has the potential to completely eliminate risk?

31. Assume the returns on Stock X were positive in January, February, April, July, and November.

The other months the returns on Stock X were negative. The returns on Stock Y were positive in January, April, May, July, August, and October and negative the remaining months. Which one of the following correlation coefficients best describes the relationship between Stock X and Stock Y?

32. Which one of the following statements is correct?

33. A portfolio comprised of which one of the following is most apt to be the minimum variance portfolio?

34. Which one of the following statements is correct concerning asset allocation?

35. You currently have a portfolio comprised of 70 percent stocks and 30 percent bonds. Which one of the following must be true if you change the asset allocation?

36. Which one of the following distinguishes a minimum variance portfolio?

37. Where does the minimum variance portfolio lie in respect to the investment opportunity set?

38. Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero?

39. Which one of the following statements about efficient portfolios is correct?

40. You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities. Which one of the following statements is correct regarding this graph?

41. You are graphing the investment opportunity set for a portfolio of two securities with the expected return on the vertical axis and the standard deviation on the horizontal axis. If the correlation coefficient of the two securities is +1, the opportunity set will appear as which one of the following shapes?

42. A portfolio that belongs to the Markowitz efficient set of portfolios will have which one of the following characteristics? Assume the portfolios are comprised of five individual securities.

43. You combine a set of assets using different weights such that you produce the following results. Which one of these portfolios CANNOT be a Markowitz efficient portfolio?

44. What is the expected return on this stock given the following information?

45. What is the expected return on this stock given the following information?

46. What is the expected return on this stock given the following information?

47. An investor owns a security that is expected to return 14 percent in a booming economy and 6 percent in a normal economy. The overall expected return on the security is 8.88 percent. Given there are only two states of the economy, what is the probability that the economy will boom?

48. Rosita owns a stock with an overall expected return of 14.40 percent. The economy is expected to either boom or be normal. There is a 48 percent chance the economy will boom. If the economy booms, this stock is expected to return 15 percent. What is the expected return on the stock if the economy is normal?

49. What is the expected return on this stock given the following information?

50. The risk-free rate is 4.35 percent. What is the expected risk premium on this security given the following information?

51. The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the following information?

52. The risk-free rate is 3.15 percent. What is the expected risk premium on this stock given the following information?

53. There is a 30 percent probability that a particular stock will earn a 17 percent return and a 70 percent probability that it will earn 11 percent. What is the risk-free rate if the risk premium on the stock is 8.60 percent?

54. Tall Stand Timber stock has an expected return of 17.3 percent. What is the risk-free rate if the risk premium on the stock is 12.4 percent?

55. What is the variance of the expected returns on this stock?

56. What is the variance of the expected returns on this stock?

57. What is the variance of the returns on a security given the following information?

58. What is the variance of the returns on a security given the following information?

59. What is the standard deviation of the returns on this stock?

60. What is the standard deviation of the returns on this stock?

61. What is the standard deviation of a security which has the following expected returns?

62. A portfolio consists of the following securities. What is the portfolio weight of stock B?

63. A portfolio consists of the following securities. What is the portfolio weight of stock X?

64. Travis has a portfolio consisting of two stocks, A and B, which is valued at $42,900. Stock A is worth $23,900. What is the portfolio weight of stock B?

65. Alicia has a portfolio consisting of two stocks, X and Y, which is valued at $89,100. Stock X is worth $57,800. What is the portfolio weight of stock Y?

66. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the expected rate of return on this portfolio?

67. You have a portfolio which is comprised of 65 percent of stock A and 35 percent of stock B. What is the expected rate of return on this portfolio?

68. You have a portfolio which is comprised of 55 percent of stock A and 45 percent of stock B. What is the expected rate of return on this portfolio?

69. You have a portfolio which is comprised of 75 percent of stock A and 25 percent of stock B. What is the expected rate of return on this portfolio?

70. You have a portfolio which is comprised of 72 percent of stock A and 28 percent of stock B. What is the variance of this portfolio?

71. You have a portfolio which is comprised of 44 percent of stock A and 56 percent of stock B. What is the variance of this portfolio?

72. You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is the standard deviation of this portfolio?

73. Roger has a portfolio comprised of $8,000 of stock A and $12,000 of stock B. What is the standard deviation of this portfolio?

74. You have a portfolio which is comprised of 20 percent of stock A and 80 percent of stock B. What is the portfolio standard deviation?

75. You have a portfolio which is comprised of 48 percent of stock A and 52 percent of stock B. What is the standard deviation of this portfolio?

76. Stock A has a standard deviation of 12 percent per year and stock B has a standard deviation of 16 percent per year. The correlation between stock A and stock B is .37. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 35 percent. What is your portfolio variance?

77. Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance?

78. Stock A has a standard deviation of 15 percent per year and stock B has a standard deviation of 21 percent per year. The correlation between stock A and stock B is .32. You have a portfolio of these two stocks wherein stock B has a portfolio weight of 60 percent. What is your portfolio standard deviation?

79. Stock X has a standard deviation of 21 percent per year and stock Y has a standard deviation of 6 percent per year. The correlation between stock A and stock B is .38. You have a portfolio of these two stocks wherein stock X has a portfolio weight of 42 percent. What is your portfolio standard deviation?

80. A stock fund has a standard deviation of 18 percent and a bond fund has a standard deviation of 11 percent. The correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum variance portfolio?

81. A stock fund has a standard deviation of 16 percent and a bond fund has a standard deviation of 4 percent. The correlation of the two funds is .11. What is the weight of the stock fund in the minimum variance portfolio?

82. Explain the primary goal of portfolio diversification as it relates to asset allocation and correlation.

83. You are advising several individual investors who are interested in investing in portfolios comprised of both stocks and bonds. In preparation for meeting with these various investors, you plot the investment opportunity set for stocks and bonds. Given this information, why might you advise some of the investors to invest in a portfolio other than the minimum variance portfolio?

84. Foreign securities are generally considered to be more risky than domestic securities. Given this assumption, explain how adding foreign securities into a domestic portfolio can affect the Markowitz efficient portfolios.