Question Details

For a portfolio of 40 randomly selected stocks


1.	Which of the following statements is CORRECT?

a.	A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.
b.	Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.
c.	A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.
d.	A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.
e.	If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
	
2.	Which of the following statements is CORRECT?

a.	A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.
b.	A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.
c.	A two-stock portfolio will always have a lower beta than a one-stock portfolio.
d.	If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
e.	A stock with an above-average standard deviation must also have an above-average beta.
	
3.	Consider the following information for three stocks, A, B, and C.  The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1.

		Expected	Standard
	Stock		Return		Deviation	Beta
	A	10%	20%	1.0
	B	10%	10%	1.0
	C	12%	12%	1.4

Portfolio AB has half of its funds invested in Stock A and half in Stock B.  Portfolio ABC has one third of its funds invested in each of the three stocks.  The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns.  Which of the following statements is CORRECT?

a.	Portfolio AB has a standard deviation of 20%.
b.	Portfolio AB's coefficient of variation is greater than 2.0.
c.	Portfolio AB's required return is greater than the required return on Stock A.
d.	Portfolio ABC's expected return is 10.66667%.
e.	Portfolio ABC has a standard deviation of 20%.
	
4.	Which of the following statements is CORRECT?

a.	If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.
b.	A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.
c.	If a stock has a negative beta, its expected return must be negative.
d.	A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
e.	According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.
	5.	For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

a.	The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.
b.	The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
c.	The beta of the portfolio is less than the average of the betas of the individual stocks.
d.	The beta of the portfolio is equal to the average of the betas of the individual stocks.
e.	The beta of the portfolio is larger than the average of the betas of the individual stocks.



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