Reading 39

Historically, which of the following asset classes has exhibited the smallest standard deviation of monthly returns?

• Large-capitalization stocks.

• Long-term corporate bonds.

• Treasury bills.

In a two-asset portfolio, reducing the correlation between the two assets moves the efficient frontier in which direction?

• The efficient frontier is stable unless the asset's expected volatility changes. This depends on each asset's standard deviation.

• The frontier extends to the left, or northwest quadrant representing a reduction in risk while maintaining or enhancing portfolio returns.

• The efficient frontier is stable unless return expectations change. If expectations change, the efficient frontier will extend to the upper right with little or no change in risk.

Stock A has a standard deviation of 10.00. Stock B also has a standard deviation of 10.00. If the correlation coefficient between these stocks is 1.00, what is the covariance between these two stocks?

• 1.00.

• -100.00.

• 0.00.

Which of the following statements about risk aversion is CORRECT?

• Risk averse investors will not take on risk.

• Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk.

• Risk aversion implies that the risk-return line, the CML, and the SML are downward sloping curves.

If the standard deviation of stock A is 13.2 percent, the standard deviation of stock B is 17.6 percent, and the covariance between the two is 0, what is the correlation coefficient?

• +1

• 0.

• 0.31.

Which of the following portfolios falls below the Markowitz efficient frontier?

• B.

• C.

• D.

The graph below combines the efficient frontier with the indifference curves for two different investors, X and Y. Which of the following statements about the above graph is least accurate?

• The efficient frontier line represents the portfolios that provide the highest return at each risk level.

• Investor X's expected return will always be less than that of Investor Y.

• Investor X is less risk-averse than Investor Y.

Which of the following statements about the optimal portfolio is NOT correct? The optimal portfolio:

• lies at the point of tangency between the efficient frontier and the indifference curve with the highest possible utility.

• is the portfolio that gives the investor the maximum level of return.

• may be different for different investors.

Stock A has a standard deviation of 0.5 and Stock B has a standard deviation of 0.3. Stock A and Stock B are perfectly positively correlated. According to Markowitz portfolio theory how much should be invested in each stock to minimize the portfolio's standard deviation?

• 30% in Stock A and 70% in Stock B.

• 100% in Stock B.

• 50% in Stock A and 50% in Stock B.

Which of the following inputs is least likely required for the Markowitz efficient frontier?

• level of risk aversion in the market.

• expected return of all securities.

• covariation between all securities.