Chapter 8Optimal Risky Portfolios.rtf

Chapter 8 Optimal Risky Portfolios150Bodie, Investments, Sixth EditionMultiple Choice Questions1. Market risk is also referred to as A) systematic risk, diversifiable risk. B) systematic risk, nondiversifiable risk. C) unique risk, nondiversifiable risk. D) unique risk, diversifiable risk. E) none of the above. Answer: B Difficulty: Easy Rationale: Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.2. Beta is the measure of A) firm specific risk. B) diversifiable risk. C) market risk. D) unique risk. E) none of the above. Answer: C Difficulty: Easy Rationale: Beta is a measure of the market risk (or systematic or nondiversifiable risk) and cannot be eliminated from the portfolio. A, B, and D are synonyms referring to the risk that can be eliminated by diversification.3. The risk that can be diversified away is A) firm specific risk. B) beta. C) systematic risk. D) market risk. E) none of the above. Answer: A Difficulty: Easy Rationale: See explanations for 1 and 2 above.Chapter 8 Optimal Risky PortfoliosBodie, Investments, Sixth Edition1514. The variance of a portfolio of risky securities A) is a weighted sum of the securities variances. B) is the sum of the securities variances. C) is the weighted sum of the securities variances and covariances. D) is the sum of the securities covariances. E) none of the above. Answer: C Difficulty: Moderate Rationale: The variance of a portfolio of risky securities is a weighted sum taking into account both the variance of the individual securities and the covariances between securities.5. Other things equal, diversification is most effective when A) securities returns are uncorrelated. B) securities returns are positively correlated. C) securities returns are high. D) securities returns are negatively correlated. E) B and C. Answer: D Difficulty: Moderate Rationale: Negative correlation among securities results in the greatest reduction of portfolio risk, which is the goal of diversification.6. The efficient frontier of risky assets is A) the portion of the investment opportunity set that lies above the global minimum variance portfolio. B) the portion of the investment opportunity set that represents the highest standard deviations. C) the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation. D) the set of portfolios that have zero standard deviation. E) both A and B are true. Answer: A Difficulty: Moderate Rationale: Portfolios on the efficient frontier are those providing the greatest expected return for a given amount of risk. Only those portfolios above the global minimum variance portfolio meet this criterion.Chapter 8 Optimal Risky Portfolios152Bodie, Investments, Sixth Edition7. The Capital Allocation Line provided by a risk-free security and N risky securities is A) the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities. B) the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier. C) the line tangent to the efficient frontier of risky securities drawn from the risk-free rate. D) the horizontal line drawn from the risk-free rate. E) none of the above. Answer: C Difficulty: Moderate Rationale: The Capital Allocation Line represents the most efficient combinations of the risk-free asset and risky securities. Only C meets that definition.例8. Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always A) greater than zero. B) equal to zero. C) equal to the sum of the securities standard deviations. D) equal to -1. E) none of the above. Answer: B Difficulty: Difficult Rationale: If two securities were perfectly negatively correlated, the weights for the minimum variance portfolio for those securities could be calculated, and the standard deviation of the resulting portfolio would be zero.Chapter 8 Optimal Risky PortfoliosBodie, Investments, Sixth Edition1539. Which of the following statements is (are) true regarding the variance of a portfolio of two risky securities? A) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance. B) There is a linear relationship between the securities coefficient of correlation and the portfolio variance. C) The degree to which the portfolio variance is reduced depends on the degree of correlation between securities. D) A and B. E) A and C. Answer: C Difficulty: Moderate Rationale: The lower the correlation between the returns of the securities, the more portfolio risk is reduced.10. Efficient portfolios of N risky securities are por。