Use the table

for the question(s) below.

Consider the

following covariances between securities:

Duke

Microsoft

Wal-Mart

Duke

0.0568

-0.0193

0.0037

Microsoft

-0.0193

0.2420

0.1277

Wal-Mart

0.0037

0.1277

0.1413

17) The variance

on a portfolio that is made up of equal investments in Duke Energy and

Microsoft stock is closest to:

A) .065

B) 0.090

C) .149

D) -0.020

18) The variance

on a portfolio that is made up of a $6000 investments in Duke Energy and a

$4000 investment in Wal-Mart stock is closest to:

A) .050

B) .045

C) .051

D) -0.020

Use the table

for the question(s) below.

Consider the

following returns:

Year End

Stock

X

Realized

Return

Stock

Y Realized Return

Stock

Z

Realized Return

2004

20.1%

-14.6%

0.2%

2005

72.7%

4.3%

-3.2%

2006

-25.7%

-58.1%

-27.0%

2007

56.9%

71.1%

27.9%

2008

6.7%

17.3%

-5.1%

2009

17.9%

0.9%

-11.3%

19) Calculate

the covariance between Stock Y’s and Stock Z’s returns.

20) Calculate

the correlation between Stock Y’s and Stock Z’s returns.

21) Calculate

the variance on a portfolio that is made up of equal investments in Stock Y and

Stock Z stock.

Answer:

Use the table

for the question(s) below.

Consider the

following covariances between securities:

Duke

Microsoft

Wal-Mart

Duke

0.0568

-0.0193

0.0037

Microsoft

-0.0193

0.2420

0.1277

Wal-Mart

0.0037

0.1277

0.1413

22) The variance

on a portfolio that is made up of a $6000

investments in Microsoft and a $4000 investment in Wal-Mart stock is closest

to:

1) Which of the

following statements is false?

A) The variance

of a portfolio is equal to the weighted average correlation of each stock

within the portfolio.

B) The variance

of a portfolio is equal to the sum of the covariances of the returns of all

pairs of stocks in the portfolio multiplied by each of their portfolio weights.

C) The variance

of a portfolio is equal to the weighted average covariances of each stock

within the portfolio.

D) The

volatility declines as the number of stocks in a portfolio grows.

2) Which of the

following statements is false?

A) The

volatility declines as the number of stocks in a portfolio grows.

B) An equally

weighted portfolio is a portfolio in which the same amount is invested in each

stock.

C) As the number

of stocks in a portfolio grows large, the variance of the portfolio is

determined primarily by the average covariance among the stocks.

D) When

combining stocks into a portfolio that puts positive weight on each stock,

unless all of the stocks are uncorrelated with the portfolio, the risk of the

portfolio will be lower than the weighted average volatility of the individual

stocks.

3) Which of the

following statements is false?

A) The expected

return of a portfolio is equal to the weighted average expected return, but the

volatility of a portfolio is less than the weighted average volatility.

B) Each security

contributes to the volatility of the portfolio according to its volatility,

scaled by its covariance with the portfolio, which adjusts for the fraction of

the total risk that is common to the portfolio.

C) Nearly half

of the volatility of individual stocks can be eliminated in a large portfolio

as a result of diversification.

D) The overall

variability of the portfolio depends on the total co-movement of the stocks

within it.

4) Which of the

following formulas is incorrect?

A) Variance of

an equally Weighted Portfolio =

(Average Variance of Individual Stocks)

(Average

covariance between the stocks)

B) Variance of a

portfolio =

C) Variance of a

portfolio =

D) Variance of a

portfolio =

5) Consider an

equally weighted portfolio that contains five stocks. If the average volatility of these stocks is

40% and the average correlation between the stocks is .5, then the volatility

of this equally weighted portfolio is closest to:

A) .17

B) .44

C) .41

D) .19

6) Consider an

equally weighted portfolio that contains 20 stocks. If the average volatility of these stocks is

35% and the average correlation between the stocks is .4, then the volatility

of this equally weighted portfolio is closest to:

A) .17

B) .41

C) .14

D) .37

7) Consider an

equally weighted portfolio that contains 100 stocks. If the average volatility of these stocks is

50% and the average correlation between the stocks is .7, then the volatility

of this equally weighted portfolio is closest to:

A) .72

B) .63

C) .40

D) .50

Use the table

for the question(s) below.

Consider the

following covariances between securities:

Duke

Microsoft

Wal-Mart

Duke

0.0568

-0.0193

0.0037

Microsoft

-0.0193

0.2420

0.1277

Wal-Mart

0.0037

0.1277

0.1413

8) What is the

variance on a portfolio that has $2000 invested in Duke Energy, $3000 invested

in Microsoft, and $5000 invested in Wal-Mart stock?

9) What is the

variance on a portfolio that has $3000 invested in Duke Energy, $4000 invested

in Microsoft, and $3000 invested in Wal-Mart stock?

11.4 Risk Versus Return: Choosing an Efficient

Portfolio

1) Which of the

following statements is false?

A) We say a

portfolio is an efficient portfolio whenever it is possible to find another

portfolio that is better in terms of both expected return and volatility.

B) We can rule

out inefficient portfolios because they represent inferior investment choices.

C) The

volatility of the portfolio will differ, depending on the correlation between

the securities in the portfolio.

D) Correlation

has no effect on the expected return on a portfolio.

2) Which of the

following statements is false?

A) When stocks

are perfectly positively correlated, the set of portfolios is identified

graphically by a straight line between them.

B) An investor

seeking high returns and low volatility should only invest in an efficient

portfolio.

C) When the

correlation between securities is less than 1, the volatility of the portfolio

is reduced due to diversification.

D) Efficient

portfolios can be easily ranked, because investors will choose from among them

those with the highest expected returns.

3) Which of the

following statements is false?

A) We say a

portfolio is long those stocks that have negative portfolio weights.

B) The efficient

portfolios are those portfolios offering the highest possible expected return

for a given level of volatility.

C) When two

stocks are perfectly negatively correlated, it becomes possible to hold a

portfolio that bears absolutely no risk.

D) The lower the

correlation of the securities in a portfolio the lower the volatility we can

obtain.

4) Which of the

following statements is false?

A) A short sale

is a transaction in which you buy a stock that you do not own and then agree to

sell that stock back in the future.

B) The efficient

portfolios are those portfolios offering the lowest possible level of

volatility for a given level of expected return.

C) A positive

investment in a security can be referred to as a long position in the security.

D) It is

possible to invest a negative amount in a stock or security call a short

position.