finance test bank

Chapter Two Test Bank

Chapter Two
Valuation, Risk, Return, and Uncertainty

A

1. An ordinary annuity is a _____ series of _____ cash.
a. finite, constant
b. finite, growing
c. infinite, constant
d. infinite, growing

B

2. The winner of a state lottery usually receives a(n)
a. ordinary annuity
b. annuity due
c. growing annuity
d. perpetuity

B

3. Using a discount rate of 8% per year, what is the present value of an ordinary
annuity of $100 per year for 10 years?
a. $1,000
b. $671
c. $887
d. $557

A

4. Using a discount rate of 8% per year, what is the present value of an annuity
due of $100 per year with 10 payments?
a. $725
b. $559
c. $793
d. $772

D

5. Using a discount rate of 8% per year (compounded quarterly), what is the
present value of an ordinary annuity of $100 per year for 10 years?
a. $726
b. $662
c. $811
d. $684

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C

6. A perpetual cash flow stream makes its first payment of $500 in one year.
Using a 7% annual discount rate and a 3% growth rate in the value of subsequent
payments, what is the present value of this growing perpetuity?
a. $2,000
b. $20,000
c. $12,500

d. $125,000

B

7. A perpetuity makes annual payments of $250. The perpetuity is valued using a
10% discount rate. What is the value of the perpetuity if the first payment is made
immediately?
a. $2,500
b. $2,750
c. $25,000
d. $2,525

A

8. The fact that most investors are risk averse means they will
a. only take risks for which they are properly rewarded
b. not take a risk
c. not voluntarily take a risk
d. not take a risk unless they know the outcome in advance

B

9. Which of the following statements is true?
a. Some people are risk averse and others are not
b. Some people are more risk averse than others
c. Risk averse people will not take a risk
d. Risk averse people are willing to settle for less return than risk neutral
people

A

10. Risk must involve
a. a chance of loss
b. an unknown probability distribution
c. actual dollars
d. negative expected returns

C

11. Overall variability of returns is called
a. systematic risk
b. unsystematic risk
c. total risk
d. undiversifiable risk

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Chapter Two Test Bank

B

12. Risk is often measured as
a. central tendency of returns
b. dispersion of returns
c. expected value of returns
d. possibility of negative returns

A

13. Riskier securities have _____ returns.
a. higher expected
b. lower realized
c. higher instantaneous
d. lower long-term

B

14. The market rewards investors for bearing _____risk.
a. diversifiable
b. undiversifiable
c. unsystematic
d. total

B

15. The diminishing marginal utility of money explains why
a. some stocks sell for more than others
b. most people will not take a fair bet
c. people view the stock market as risky
d. people tend to pay too much

C

16. The text described an example of the diminishing marginal utility of money
with a statement made by a _____ player.
a. hockey
b. football
c. tennis
d. basketball

C

17. Individual investment behavior is more a function of _____ than _____.
a. risk, expected return
b. expected return, utility
c. utility, expected return
d. expected return, risk

B

18. The St. Petersburg paradox explains why
a. some stocks sell for more than others
b. most people will not take a fair bet
c. people view the stock market as risky
d. people tend to pay too much

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A

19. In economic theory, if money is not saved, it is
a. consumed
b. invested
c. unrealized
d. deferred

D

20. Wearing a Rolex watch is an example of someone getting
a. psychic return
b. utility
c. satisfaction
d. all of the above

B

21. Two large classes of risk are
a. systematic and undiversifiable
b. price and convenience
c. realized and psychic
d. market and intermarket

C

22. Individual consumption decisions are a major factor in determining
a. credit ratings of corporations
b. dividend rates
c. market interest rates
d. levels of perceived risk

B

23. If a stock has a higher than average expected return, you would logically
expect it is
a. widely held by investors
b. riskier than average

c. in an industry with good prospects
d. a well-managed company

D

24. What is the present value of a growing perpetuity with an initial cash flow of
1000 (C0), a growth rate of 3% per year (g), and a required rate of return of 8%
(R)?
a. $7777.64
b. $12,500
c. $20,000
d. $20,600

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Chapter Two Test Bank

C

25. Most investors would not be interested in a fair bet because
a. they would be concerned whether it is really fair
b. investors do not willingly take a risk when it is possible to lose money
c. losing a given amount of money would reduce utility more than winning
the same amount would increase utility
d. they accept only bets with a sure outcome

B

26. The holding period return is calculated as

P1  P0
P0
P  P  income
b. 1 0
P0
P  P  income
c. 0 1
P0
P  P  income
d. 1 0
P0

a.

C

27. You bought 100 shares of stock at $35, received $3 per share in dividends,
and sold the shares for $50. Your holding period return is
a. 36%
b. $1,503
c. 51.4%
d. $5,300

B

28. Which of the following is true of the holding period return?
a. It considers the time value of money
b. It is independent of the passage of time
c. It explicitly considers risk
d. It only considers capital gains or losses

C

29. A holding period return should only be compared with returns calculated
a. over shorter periods
b. over longer periods
c. over periods of the same length
d. over periods of the same length or less

D

30. A stock's return is 15.5%. The return relative is
a. 0.845
b. -0.845
c. 0.155
d. 1.155

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D

31. Return relatives are calculated primarily to deal with the potential problem of
a. changing returns
b. large returns
c. zero returns
d. negative returns

A

32. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its arithmetic average
return is
a. 2%
b. 3%
c. 4%
d. 5%

A

33. A stock has monthly returns of 4%, 5%, 2%, and -3%. Its geometric average
return is
a. 1.9%
b. 2.1%
c. 3.3%
d. cannot be determined

B

34. You buy a stock for $50 per share. Over the next four months, it has monthly
returns of 4%, 5%, 2%, and -3%. The value of a share at the end of the fourth
month is
a. $51.20
b. $54.02
c. $54.12
d. $56.45

A

35. Suppose a stock pays no dividends. Another method of calculating the return
relative is
a.
b.
c.
d.

P1
P0
P0
P1
P1  P0
P0

P0  P1
P1

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Chapter Two Test Bank

A

36. The arithmetic mean is always _______ the geometric mean.
a. greater than or equal to
b. greater than
c. less than or equal to
d. less than

A

37. The _____ the dispersion in a series of numbers, the ____ the gap between the
arithmetic and geometric mean.
a. greater, greater
b. greater, smaller
c. smaller, greater
d. more predictable, less predictable

A

38. Technically, _____ refers to the past; _____ refers to the future.
a. return, expected return
b. realized return, return
c. return relative, return
d. return, return relative

C

39. According to the book, which of the following terms can mean different things
to different people?
a. Return on assets
b. Return on equity
c. Return on investment
d. Return of principal

B

40. The use of _____ can dramatically affect an investor's return.
a. historical data

b. leverage
c. arithmetic averages
d. variance calculations

D

41. Total risk can be measured by all of the following EXCEPT
a. variance
b. standard deviation
c. semi-variance
d. arithmetic mean
42. The variance of x is 25. What is the variance of 2x?
a. 25
b. 50
c. 75
d. 100

D

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Chapter Two Test Bank

B

43. Semi-variance only considers
a. extreme variation
b. adverse variation
c. unexpected variation

d. anticipated variation

C

44. Discrete random variables are _____; continuous random variables are
______.
a. quantifiable, unquantifiable
b. objective, subjective
c. counted, measured
d. dependent, independent

B

45. A variable whose value is based on the value of other variables is a(n)
a. independent variable
b. dependent variable
c. stochastic variable
d. estimated variable

A

46. Random variables reside in a
population
a. sample
b. continuous set
c. discrete set

A

47. A jar contains a mixture of coins; you need a quarter. From your perspective,

the distribution of coins in the jar is
univariate
a. bivariate
b. trivariate
c. multivariate
48. If a distribution shows more possible outcomes on one side of the mean than
the other, the distribution shows
a. uniformity
b. normal characteristics
c. random characteristics
d. skewness

D

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Chapter Two Test Bank

D

49. A coin-flipping experiment in which you measure heads or tails takes
observations from a _____ distribution.
a. chi-square
b. exponential
c. Poisson
d. binomial

D

50. Which of the following is a measure of central tendency?
a. Skewness
b. Variance
c. Kurtosis
d. Mean

D

51. The expected value of a random variable is also called the
a. skewness
b. variance
c. kurtosis
d. mean

D

52. A jar contains 100 quarters, 50 dimes, and 50 nickels. What is the expected
value of a single observation from this coin population?
a. $0.375
b. $0.200
c. $0.133
d. $0.163

D

53. Which of the following can help reduce the effect of outliers?
a. Rounding
b. Regression
c. Interpolation
d. Logarithms

C

54. The expected value of x is 5%. What is E(6x)?
a. 0.833%
b. 5%
c. 30%
d. Cannot be determined

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Chapter Two Test Bank

A

55. The correlation coefficient is equal to
a.

~
cov(a~, b )

 a b
~
b. cov(a~, b ) a b

c.

~
cov(a~, b ) a

d. 1  [

b

~
cov(a~, b )

 a b

]

A

56. The minimum value of the correlation coefficient is
a. -1
b. 0
c. +1
d. there is no minimum value

D

57. The minimum value of covariance is
a. -1
b. 0
c. +1
d. there is no minimum value

A

58. R squared is a measure of
a. goodness of fit
b. partial dispersion
c. central tendency
d. skewness

B

59. A sample of 100 observations has a standard deviation of 25. What is the
standard error?
a. 5
b. 2.5
c. .25
d. Cannot be determined

C

60. A sample of 100 observations has a standard deviation of 25 and a mean of
75. What is the 95% confidence interval?
a. 50  x  75
b. 73  x  77
c. 70  x  80
d. 74.5  x  75.5

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Chapter Two Test Bank

B

61. The expected return on A is 12%; the expected return on B is 15%. What is
the expected return of a portfolio that contains one-third A and the remainder B?
a. 12%
b. 14%
c. 15%
d. 13.5%

A

62. A tilde (~) over a symbol indicates it is a
a. random variable
b. constant
c. continuous random variable
d. discrete random variable

B

63. If two securities are negatively correlated, their covariance is
a. positive
b. negative
c. zero
d. cannot be determined

C

64. The covariance between a random variable and a constant is
a. negative
b. positive
c. zero

d. non-negative

A

65. Return is the
a. benefit associated with an investment
b. realized gain from an investment
c. realized and unrealized gain from an investment
d. measurable gain from an investment

C

66. Assume the risk-free rate is constant over time. The correlation between the
return on security x and the return on the risk-free asset is
a. negative
b. positive
c. zero
d. cannot be determined without further information

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Chapter Two Test Bank

A

67. The correct method for measuring the average return over several periods in
the past is with a(n)
a. geometric mean
b. arithmetic mean

c. statistical mean
d. multiple variation mean

B

68. Using semivariance to measure risk is appropriate if the return distribution is
a. symmetrical
b. not symmetrical
c. normally distributed
d. uniformly distributed

C

69. The median of a distribution is the
a. arithmetic average
b. geometric average
c. point where half of the observations lie on either side
d. value that occurs most frequently

D

70. If the variance of x is 0.10, what is the variance of 2x?
a. 0.05
b. 0.10
c. 0.20
d. 0.40

B

71. If the standard deviations of Stock A and B are 0.20 and 0.30 respectively and

the COV(A,B) equals 0.012, what is the correlation coefficient?
a. 0.00072
b. 0.20
c. 0.30
d. 2
Chapter Three
Setting Portfolio Objectives

A

1. Two dominant factors contributing to a successful investment program are
a. suitable investment objectives and policy, and successful managers
b. suitable investment objectives and risk assessment
c. successful managers and successful income generation
d. accurate risk assessment and measurement of historical return

B

2. To an investment professional, which of the following provides no growth?
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a.
b.
c.
d.

Real estate

Savings accounts
Common stock
Corporate bonds

B

3. With bequests, a semantic problem sometimes develops with regard to the
meaning of the terms
a. growth and income
b. principal and interest
c. risk and return
d. present value and future value

D

4. A good example of the issue of multiple portfolio beneficiaries is found in
people
a. who want income and those who want growth
b. who are risk averse and those who are not
c. who pay taxes and those who do not
d. today and people tomorrow

A

5. Which of the following deals with decisions that have been made about longterm investment activities, eligible investment categories, and the allocation of
funds among the eligible investment categories?
a. Investment policy
b. Investment strategy
c. Investment tactics
d. Investment standards

C

6. All of the following are principal portfolio objectives EXCEPT
a. stability of principal
b. capital appreciation
c. growth and income
d. income

A

7. If someone wants no chance of a loss of principal value, the appropriate
primary objective is
a. stability of principal
b. income
c. growth of income
d. capital appreciation
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C

8. If someone is concerned about inflation eroding purchasing power of regular
income, the appropriate primary objective is
a. stability of principal
b. income
c. growth of income
d. capital appreciation

D

9. A young, well-paid professional is best suited, on average, to which primary
objective?
a. Stability of principal
b. Income
c. Growth of income
d. Capital appreciation

D

10. In the early years, which primary objective generally results in the least
income?
a. Stability of principal
b. Income
c. Growth of income
d. Capital appreciation

A

11. A growth-of-income objective
a. sacrifices some current return for some purchasing power protection
b. generates maximum income as soon as possible
c. makes only sparing use of equity securities
d. generates income that declines over time

B

12. Tax-free income can be earned by investing in

a. corporate bonds
b. municipal bonds
c. treasury bonds
d. common stock

C

13. All investors seek to
a. maximize their expected return
b. minimize their risk exposure
c. maximize their expected utility
d. minimize the number of their capital losses

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B

14. Some people do not like mutual funds because they
a. have no tax advantages
b. are not exciting
c. offer less potential return than that available in securities
d. are too risky

D

15. Establishing a secondary objective helps the portfolio manager
a. learn more about the client's tax situation

b. learn more about the client's expected utility of investment
c. determine the appropriate level of risk for the customer
d. determine the necessary level of equity investment

C

16. Which of the following primary/secondary objective combinations is
infeasible?
a. Stability of principal, income
b. Income, stability of principal
c. Growth of income, stability of principal
d. Capital appreciation, growth of income

A

17. Which of the following primary/secondary objective combinations is
infeasible?
a. Stability of principal, growth of income
b. Income, growth of income
c. Growth of income, capital appreciation
d. Income, capital appreciation

B

18. Which of the following primary/secondary objective combinations is
infrequent?
a. Stability of principal, growth of income
b. Income, capital appreciation
c. Growth of income, capital appreciation
d. Growth of income, stability of principal

A

19. A disadvantage of portfolio splitting is that it
a. enables overseers to avoid making tough decisions
b. reduces current income
c. reduces the potential for capital appreciation
d. sacrifices liquidity

A

20. A common third category of investment (in addition to bonds and stock) is
a. cash equivalents
b. municipal securities
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c. American depository receipts
d. repurchase agreements
A

21. Another name for portfolio dedication is
a. liability funding
b. technical analysis
c. fundamental analysis
d. strategic investment

B

22. Cash matching involves assembling a portfolio such that it
a. has the duration desired
b. has a cash flow stream that matches the requirements of a liability
stream
c. optimizes the risk/return combination
d. is informationally efficient

A

23. Principal concerns in duration matching are the
a. present value of the outflows and their duration
b. future value of the outflows and their duration
c. annuity value of the outflows
d. certainty equivalent of the outflows and the present value of its duration

D

24. To reduce the duration of a bond portfolio, managers often use
a. shares of common stock
b. hard asset investments
c. preferred stock shares
d. treasury bills

C

25. The first mutual fund was founded in
a. 1776
b. 1815
c. 1924

d. 1957

C

26. The approximate number of mutual funds in the United States is
a. 100
b. 1,000
c. 10,000
d. 30,000

A

27. Which of the following trades on a stock exchange?
a. A closed-end fund
b. An open-end fund
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c. Any mutual fund
d. Any investment company
C

28. For an open-end mutual fund
a. net asset value < market value
b. net asset value > market value
c. net asset value = market value
d. net asset value is greater than or equal to market value

C

29. If you buy shares in a load fund, you will pay
a. net asset value
b. less than net asset value
c. more than net asset value
d. cannot be determined

A

30. Before buying mutual fund shares, prospective investors must receive a
a. prospectus
b. indenture
c. debenture
d. hypothecation agreement

B

31. The portfolio objective with the highest risk is
a. stability of principal
b. capital appreciation
c. income
d. growth of income

D

32. A client’s need for liquidity might best be addressed by
a. investing in growth industry stocks
b. investing in real estate
c. increasing the proportion of bonds in the portfolio

d. investing a portion of the portfolio in assets with checkwriting privileges

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A

33. Money market mutual funds are sometimes added in a portfolio to
a. reduce the duration
b. increase the duration
c. move from an income objective to a growth in income objective
d. decrease the short-term tax consequences

D

34. An objective to lower the short-term taxes for a client might be addressed by
including
a. stocks in the utilities industry
b. short-term U.S. Treasury securities
c. long-term U.S. Treasury securities
d. municipal bonds

C

35. A no-load mutual fund means there are no
a. management fees
b. 12 b-1 fees
c. selling fees

d. stocks that pay dividends in this mutual fund

B

36. A redemption fee is a cost to the
a. manager of a mutual fund to pay for poor investment decisions
b. manager of a mutual fund when he resigns
c. investor of a mutual fund on the sale of shares
d. investor of a mutual fund when performance is poor

D

37. A mutual fund prospectus provides
a. a forecast of future fund performance
b. a forecast of the macroeconomy over the next year
c. a forecast of the expected tax consequences over the next year
d. provides the fund’s purpose and intended investment activity

A

38. The majority of mutual funds can be classified as
a. stock funds
b. taxable bond funds
c. municipal bond funds
d. money market funds

D

39. Which of the following deal with decisions that have been made about longterm decisions?
a. Investment constraints

b. Fiduciary interest
c. Investment strategy
d. Investment policy
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Chapter Four
Investment Policy

C

1. Retirement plans in the United States are subject to
a. FDRC
b. FERC
c. ERISA
d. ESSES

A

2. All of the following are purposes of an investment policy statement EXCEPT
a. identify portfolio manager
b. identify target return
c. identify investment constraints
d. provide a mechanism for evaluation

B

3. Clients are responsible for all of the following EXCEPT

a. defining long-range objectives
b. asset allocation
c. ensuring managers follow the investment policy
d. establishing investment policy

D

4. The investment manager is responsible for all of the following EXCEPT
a. educating the client regarding infeasible objectives
b. monitoring the portfolio
c. revising the portfolio as necessary
d. establishing investment policy

B

5. In the Bailard, Biehl, and Kaiser classification system what kind of person is
impetuous and anxious?
a. Individualist
b. Celebrity
c. Adventurer
d. Guardian

A

6. In the Bailard, Biehl, and Kaiser classification system what kind of person is
confident and careful?
a. Individualist
b. Celebrity
c. Adventurer
d. Guardian

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C

7. In the Bailard, Biehl, and Kaiser classification system what kind of person is
impetuous and confident?
a. Individualist
b. Celebrity
c. Adventurer
d. Guardian

D

8. All of the following are true regarding an endowment fund EXCEPT
a. it is not-for-profit
b. churches and universities often have one
c. it has a board of trustees or directors
d. is has a maximum life of 75 years

B

9. An endowment is most similar to a
a. defined contribution pension plan
b. foundation
c. property and casualty insurance company
d. mutual fund

C

10. The legal literature speaks of the ______ between the needs of current
beneficiaries and future beneficiaries.
a. parsimony
b. symbiosis
c. creative tension
d. rational expectations

A

11. An investor’s tendency to look at their investment portfolio too often is
partially explained by a phenomenon known as
a. myopic loss aversion
b. absolute risk aversion
c. time and state preference
d. mental accounting

D

12. Surplus management is most associated with
a. mutual funds
b. endowment funds
c. foundations
d. insurance companies

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C

13. The single most important investment decision is
a. time horizon
b. investment strategy
c. asset allocation
d. risk assessment

B

14. A good performance benchmark should be
a. published in a national financial newspaper like the Wall Street Journal
b. investable
c. composed equally of stocks and bonds
d. revised as market conditions change

B

15. All of the following are infeasible return objectives EXCEPT
a. maintain purchasing power with 100% probability
b. average a 9% rate of return over a five year average
c. earn a 10% rate of return each calendar year
d. ensure the value of the fund never falls below the initial principal and
that it produces an annual yield of 7%

A

16. Most states have adopted the

a. Uniform Management of Institutional Funds Act
b. Foundation Policy Act
c. Uniform Statement of Investment Policy
d. Safe Harbor Institutional Security Statement

D

17. Major categories of constraints in the investment policy statement include all
of the following EXCEPT
a. tax situation
b. liquidity needs
c. legal considerations
d. benchmarking

A

18. Purposes of an endowment fund include all of the following EXCEPT
a. raise the visibility of the institution
b. help maintain operating independence
c. provide operational stability
d. provide a margin of excellence

B

19. The two main types of pension funds are
a. defined contribution and variable contribution
b. defined contribution and defined benefit
c. fixed annuity and variable annuity
d. equity based and fixed income based
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D

20. The investment policy of which of the following is mostly liability driven?
a. Mutual fund
b. Property and casualty insurance company
c. Foundation
d. Life insurance company

A

21. Characteristics of a good investment policy statement include all of the
following EXCEPT
a. revised quarterly
b. realistic
c. unambiguous to an outsider
d. sustainable over prior periods

B

22. The investment policy is the responsibility of the
a. investment manager
b. client
c. ERISA administrators
d. SEC

C

23. Enforcing the ERISA regulations is the responsibility of
a. investment managers
b. the Federal Reserve
c. the Department of Labor
d. the SEC

D

24. The investment policy statement should be changed if there is a material
change in
a. economic conditions
b. the performance of the portfolio
c. the allocation of assets in the portfolio
d. the clients financial condition

C

25. A foundation is
a. the section of an investment policy statement that specifies the primary
goals and objectives of an investor
b. the first section of an investment policy statement
c. an organization designed to aid the arts, education, research or
general welfare
d. a legal document outlining the portfolio management principles
to be followed

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D

26. A fiduciary is
a. an investor with experience managing investments
b. an investor with little experience managing investments
c. an investment advisor to those managing investments
d. someone responsible for the management of someone else’s money

A

27. Socially responsible investing based on religious beliefs is known as
a. faith-based investing
b. denominational investing
c. religious fund management
d. life ethics investing
Chapter Five
The Mathematics of Diversification

A

1. The work of Harry Markowitz is based on the search for
a. efficient portfolios
b. undervalued securities
c. the highest long-term growth rates
d. minimum risk portfolios

B

2. Securities A and B have expected returns of 12% and 15%, respectively. If you
put 30% of your money in Security A and the remainder in B, what is the portfolio
expected return?
a. 13.4%
b. 14.1%
c. 14.6%
d. 15.3%

B

3. Securities A and B have expected returns of 12% and 15%, respectively. If you
put 40% of your money in Security A and the remainder in B, what is the portfolio
expected return?
a. 13.4%
b. 13.8%
c. 14.6%
d. 15.3%

B

4. The variance of a two-security portfolio decreases as the return correlation of
the two securities
a. increases
b. decreases
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c. changes in either direction

d. cannot be determined
D

5. A security has a return variance of 25%. The standard deviation of returns is
a. 5%
b. 15%
c. 25%
d. 50%

C

6. A security has a return variance of 16%. The standard deviation of returns is
a. 4%
b. 16%
c. 40%
d. 50%

A

7. Covariance is the product of two securities'
a. expected deviations from their means
b. standard deviations
c. betas
d. standard deviations divided by their correlation

C

8. The covariance of a random variable with itself is
a. its correlation with itself
b. its standard deviation

c. its variance
d. equal to 1.0

D

9. Covariance is _____ correlation is ______.
a. positive, positive or negative
b. negative, positive or negative
c. positive or negative, positive or zero
d. positive or negative, positive or negative

C

10. For a six-security portfolio, it is necessary to calculate ___ covariances plus
___ variances.
a. 36, 6
b. 30, 6
c. 15, 6
d. 30, 12

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Chapter Two Test Bank

B

11. COV (A,B) = .335. What is COV (B,A)?
a. - 0.335
b. 0.335

c. (0.335 x 0.335)
d. Cannot be determined

A

12. One of the first proponents of the single index model was
a. William Sharpe
b. Robert Merton
c. Eugene Fama
d. Merton Miller

B

13. Without knowing beta, determining portfolio variance with a sixty-security
portfolio requires ___ statistics per security.
a. 1
b. 60
c. 3600/2
d. 3600

B

14. Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively. What is
the beta of an equally weighted portfolio of all three?
a. 1.15
b. 1.40
c. 1.55
d. 1.60

B

15. Securities A, B, and C have betas of 1.2, 1.3, and 1.7, respectively. What is
the beta of a portfolio composed of 1/2 A and 1/4 each of B and C?
a. 1.15
b. 1.35
c. 1.55
d. 1.60

B

16. A diversified portfolio has a beta of 1.2; the market variance is 0.25. What is
the diversified portfolio’s variance?
a. 0.33
b. 0.36
c. 0.41
d. 0.44

B

17. Security A has a beta of 1.2; security B has a beta of 0.8. If the market
variance is 0.30, what is COV (A,B)?
a. .255
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