Investments (3315) Chapter 06 Test Bank - Static

The University of Texas at Arlington

Investments (3315)

an investor’s degree of risk aversion will determine his or her ______.

1. Risk that can be eliminated through diversification is called ______ risk.
A. unique
B. firm-specific
C. diversifiable
D. all of these options
2. The _______ decision should take precedence over the _____ decision.
A. asset allocation; stock selection
B. bond selection; mutual fund selection
C. stock selection; asset allocation
D. stock selection; mutual fund selection
3. Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.
A. they had to pay huge fines for obstruction of justice
B. their 401k accounts were held outside the company
C. their 401k accounts were not well diversified
D. none of these options
4. Based on the outcomes in the following table, choose which of the statements below is (are) correct?
I. The covariance of security A and security B is zero.
II. The correlation coefficient between securities A and C is negative.
III. The correlation coefficient between securities B and C is positive.
A. I only
B. I and II only
C. II and III only
D. I, II, and III
5. Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A riskaverse
investor would prefer a portfolio using the risk-free asset and ______.
A. asset A
B. asset B
C. no risky asset
D. The answer cannot be determined from the data given.
6. Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.
A. up; right
B. up; left
C. down; right
D. down; left
7. An investor’s degree of risk aversion will determine his or her ______.
A. optimal risky portfolio
B. risk-free rate
C. optimal mix of the risk-free asset and risky asset
D. capital allocation line
8. The ________ is equal to the square root of the systematic variance divided by the total variance.
A. covariance
B. correlation coefficient
C. standard deviation
D. reward-to-variability ratio
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9. Which of the following statistics cannot be negative?
A. covariance
B. variance
C. E(r)
D. correlation coefficient
10. Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?
A. .40
B. .50
C. .75
D. .80
11. The correlation coefficient between two assets equals _________.
A. their covariance divided by the product of their variances
B. the product of their variances divided by their covariance
C. the sum of their expected returns divided by their covariance
D. their covariance divided by the product of their standard deviations
12. Diversification is most effective when security returns are _________.
A. high
B. negatively correlated
C. positively correlated
D. uncorrelated
13. The expected rate of return of a portfolio of risky securities is _________.
A. the sum of the securities’ covariance
B. the sum of the securities’ variance
C. the weighted sum of the securities’ expected returns
D. the weighted sum of the securities’ variance
14. Beta is a measure of security responsiveness to _________.
A. firm-specific risk
B. diversifiable risk
C. market risk
D. unique risk
15. The risk that can be diversified away is __________.
A. beta
B. firm-specific risk
C. market risk
D. systematic risk

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