The correct answer for each question is indicated by a .

1

Which of the following portfolios have the least risk?

A)

A portfolio of treasury bills

B)

A portfolio of long-term United States Government bonds

C)

Standard and Poor's composite index

D)

Portfolio of common stocks of small firms

2

If held for possible resale, long-term government bonds have:

A)

Interest rate risk

B)

Default risk

C)

Market risk

D)

None of the above

3

If the average annual rate of return for common stocks is 13%, and treasury bills is 3.8%, what is the average market risk premium?

A)

13%

B)

3.8%

C)

9.2%

D)

None of the above

4

Safro Corporation has had returns of -5%, 15% and 20% for the past three years. Calculate the standard deviation of the returns. (hint: assume this is a sample of the population).

A)

10.22%

B)

22.91%

C)

30.92%

D)

13.23%

5

The portion of the risk that can be eliminated by diversification is called:

A)

Unique risk

B)

Market risk

C)

Interest rate risk

D)

Default risk

6

Stock A has an expected return of 10% per year and stock B has an expected return of 20%. If 55% of the funds are invested in stock B, what is the expected return on the portfolio of stock A and stock B?

A)

10%

B)

14.5%

C)

15.5%

D)

20%

7

For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks is:

A)

+1

B)

0

C)

−0.5

D)

−1

8

The "beta" is a measure of:

A)

Unique risk

B)

Market risk

C)

Total risk

D)

None of the above

9

The variance or standard deviation is a measure of:

A)

Total risk

B)

Unique risk

C)

Market risk

D)

None of the above

10

The beta of a risk-free portfolio is:

A)

0

B)

+0.5

C)

+1.0

D)

−1.0

11

The variance of the market return is

A)

The standard deviation.

B)

The expected return.

C)

The expected squared deviation from the expected return.

D)

The square root of the covariance.

12

What is the arithmetic average return of bonds earning 5%, stocks earning 11% and treasuries earning 2%?

A)

2%

B)

5%

C)

6%

D)

11%

13

Diversification works because?

A)

Market risk is eliminated

B)

Correlation coefficients

C)

All of the above

D)

None of the above

14

Stocks with betas _______________ tend to amplify the overall movements of the market.

A)

Equal to 1

B)

Greater than 1

C)

Less than one

D)

None of the above

15

The risk of a well diversified portfolio depends upon the

A)

Market risk

B)

Unique risk of the securities included in the portfolio

C)

Number of securities in the portfolio

D)

Variance of the portfolio

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