Chapter 07 MCQs

QUESTION 1
1. The unsystematic risk of a specific security
results from factors unique to the firm.
depends on market volatility.
is likely to be higher in an increasing market.
cannot be diversified away.
1 points   
QUESTION 2
1. Firm-specific risk is also referred to as
diversifiable risk or market risk.
systematic riskor market risk.
diversifiable risk or unique risk.
systematic riskor diversifiable risk.
1 points   
QUESTION 3
1. Two securities have a covariance of 0.076. If their respective standard deviations are
13% and 22%, what is their correlation coefficient?
0.58
0.95
0.38
0.22
0.72
1 points   
QUESTION 4
1. Given an optimal risky portfolio with expected return of 12%, standard deviation of
26%, and a risk free rate of 3%, what is the slope of the best feasible CAL?
0.36
0.14
0.64
0.35
0.08
1 points   
QUESTION 5
1. Nondiversifiable risk is also referred to as
 systematic riskor market risk.
unique riskor market risk.
systematic riskor unique risk.
unique riskor firm-specific risk.
1 points   
QUESTION 6
1. The variance of a portfolio of risky securities
is the weighted sum of the securities' variances and
covariances.
is a weighted sum of the securities' variances.
is the sum of the securities' covariances.
None of the options are correct.
is the sum of the securities' variances.
1 points   
QUESTION 7
1. Given an optimal risky portfolio with expected return of 12%, standard deviation of
26%, and a risk free rate of 5%, what is the slope of the best feasible CAL?
0.27
0.33
0.08
0.64
0.36
1 points   
QUESTION 8
1. Which statement about portfolio diversification is correct?
Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's
expected return.
The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60
individual securities have been purchased.
None of the statements are correct.
Proper diversification can eliminate systematic risk.
Typically, as more securities are added to a portfolio, total risk would be expected to decrease
at a decreasing rate.
1 points   
QUESTION 9
 1. Which of the following statement(s) is(are) false regarding the variance of a portfolio of
two risky securities?
1. I) The higher the coefficient of correlation between securities, the greater the
reduction in the portfolio variance.
2. II) There is a linear relationship between the securities' coefficient of
correlation and the portfolio variance.
3. III) The degree to which the portfolio variance is reduced depends on the
degree of correlation between securities.
4.I and II
III only
I only
II only
I and III
1 points   
QUESTION 10
1. Security X has expected return of 12% and standard deviation of 18%. Security Y has
expected return of 15% and standard deviation of 26%. If the two securities have a
correlation coefficient of 0.7, what is their covariance?
0.018
0.038
0.070
0.033
0.054