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Exam 6: Efficient Diversification

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Question 1

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An investor can design a risky portfolio based on two shares, A and B. The standard deviation of return on Share A is 24% while the standard deviation on Share B is 14%. The correlation coefficient between the return on A and B is 0.35. The expected return on Share A is 25% while on Share B it is 11%. The proportion of the minimum variance portfolio that would be invested in Share B is approximately ________.

A) 45%
B) 67%
C) 85%
D) 92%

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Question 2

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Which share is likely to further reduce risk for an investor currently holding his portfolio in a well-diversified portfolio of common share?

A) Share A
B) Share B
C) There is no difference between A or B
D) You cannot tell from the information given The figures below show plots of monthly excess returns for two shares plotted against excess returns for a market index.

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Question 3

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An investor's degree of risk aversion will determine their ________.

What is the standard deviation of a portfolio of two shares given the following data? Share A has a standard deviation of 18%. Share B has a standard deviation of 14%. The portfolio contains 40% of Share A and the correlation coefficient between the two shares is -.23.

The term excess-return refers to ________.

Suppose that a share portfolio and a bond portfolio have a zero correlation. This means that ________.

Which share is riskier to a non-diversified investor who puts all his money in only one of these shares?

The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is ________.

The standard deviation of return on investment A is .10 while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is ________.

Firm-specific risk is also called ________ and ________.

Market risk is also called ________ and ________.

The term 'complete portfolio' refers to a portfolio consisting of ________.

On a standard expected return vs. standard deviation graph investors will prefer portfolios that lie to the ________ of the current investment opportunity set.

Diversification is most effective when security returns are ________.

If you want to know the portfolio standard deviation for a three share portfolio you will have to ________.

The values of beta coefficients of securities are ________.

The part of a share's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the share market II. The sensitivity of the share's returns to changes in the share market III. The variance in the share's returns that is unrelated to the overall share market

A measure of the riskiness of an asset held in isolation is ________.

Which risk can be diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of Security B in the minimum variance portfolio is ________.