Multiple choice

1.  A statistical measure of the degree to which securities' returns move together is called:  

a. Variance 

b. Correlation Coefficient 

c. Standard Deviation 

d. None of the above 

2.  The type of the risk that can be eliminated by diversification is called:  

a. Market risk 

b. Unique risk 

c. Interest rate risk 

d. Default risk 

3. The unique risk is also called the:  

a. Unsystematic risk 

b. Diversifiable risk 

c. Firm specific risk 

D. All of the above 

4. Market risk is also called: I) Systematic risk, II) Undiversifiable risk, III) Firm specific risk.  

a. I only 

b. II only 

c. III only 

a. I and II only 

5. Stock A has an expected return of 10% per year and stock B has an expected return of 20%. If 40% of the funds are invested in stock A, and the rest in stock B, what is the expected return on the portfolio of stock A and stock B?  

a. 10% 

b. 20% 

a. 16% 

d. None of the above 

6. As the number of stocks in a portfolio is increased:  

a. Unique risk decreases and approaches to zero 

b. Market risk decreases 

c. Unique risk decreases and becomes equal to market risk 

d. Total risk approaches to zero 

7. Stock M and Stock N have had the following returns for the past three years of -12%. 10%, 32%; and 15%, 6%, 24% respectively. Calculate the covariance between the two securities.  

a. -99 

b. +99 

c. +250 

d. None of the above 

8. Stock P and stock Q have had annual returns of -10%, 12%, 28% and 8%, 13%, 24% respectively. Calculate the covariance of return between the securities.  

a. -149 

b. +149 

c. 100 

d. None of the above 

9. Stock X has a standard deviation of return of 10%. Stock Y has a standard deviation of return of 20%. The correlation coefficient between stocks is 0.5. If you invest 60% of the funds in stock X and 40% in stock Y, what is the standard deviation of a portfolio?  

a. 10% 

b. 20% 

c. 12.2% 

d. None of the above 

10. If the correlation coefficient between stock C and stock D is +1.0% and the standard deviation of return for stock C is 15% and that for stock D is 30%, calculate the covariance between stock C and stock D.  

a. +45 

b. -450 

c. +450 

d. None of the above