ch11

Student: ___________________________________________________________________________

1. The return you anticipate earning in the future on a risky asset is called the _____ return.
A. realized
B. real
C. market
D. expected
E. actual
2. The combination of assets held by an investor is called a:
A. set.
B. grouping.
C. portfolio.
D. basket.
E. frontier.
3. The portfolio weight of an asset is the:
A. cost invested in that asset expressed as a percentage of the total cost of the portfolio.
B. number of shares held in that asset divided by the total number of shares owned.
C. return on the asset as a fraction of the entire return on the portfolio.
D. market value of that asset expressed as a percentage of the total portfolio value.
E. market value of that asset expressed as a percentage of the asset's initial cost.
4. The reduction in risk realized when a portfolio is invested in a variety of assets is called:
A. efficiency improvement.
B. risk realization.
C. frontier adjustment.
D. correlation.
E. diversification.
5. Correlation is the:
A. realized return expressed as a percentage of the expected return.
B. extent to which the returns on two assets move together.
C. measurement of the systematic risk contained in an asset.
D. daily return on an asset compared to its previous daily return.
E. risk of an asset measured in percentage terms.
6. The manner in which an investor spreads his or her portfolio across a variety of securities is called:
A. asset allocation.
B. the efficient frontier.
C. correlation.
D. minimization.
E. the investment opportunity set.

1
7. The collection which represents all possible risk-return combinations which can be created from
portfolios comprised of two individual assets is called the:
A. minimum variance set.
B. financial frontier.
C. efficient portfolio.
D. investment opportunity set.
E. dominated set.
8. A portfolio which generates the highest possible return for a given level of risk is called the:
A. variance.
B. investment opportunity set.
C. diversified portfolio.
D. efficient portfolio.
E. financial frontier.
9. The Markowitz efficient frontier is defined as the:
A. total possible risk-return combinations which can be generated from two individual assets.
B. minimum variance portfolio.
C. entire set of efficient portfolios given varying levels of risk.
D. highest level of return which can be obtained given any combination of two individual assets.
E. single most efficient portfolio which can be generated from two individual assets.
10. The extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset is
called the:
A. portfolio adjustment.
B. diversification benefit.
C. inefficient premium.
D. expected return.
E. risk premium.
11. Which one of the following statements is correct given various states of the economy?
A. Stock returns are generally not affected by the state of the economy.
B. The summation of the probabilities of the various economic states must equal 10.
C. The probabilities of the various economic states affect the expected return on a stock but not the level
of risk associated with those returns.
D. Both the risk and the return on a security are affected by the likelihood of various economic states
occurring.
E. The majority of stock returns increase as the state of the economy worsens.
12. Which one of the following statements is correct?
A. The various economic states of the economy are generally equally likely to occur in any given year.
B. Most stocks tend to have the same return regardless of the economic state.
C. The expected state of the economy can have a major impact on the expected return on a portfolio.
D. If the economy moves into a recessionary period from a normal period, all stocks will have lower
expected returns.
E. A change in the probability of a state of the economy occurring has no impact on the expected return
on a portfolio of risky assets.

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13. You are computing the expected return on a portfolio of 6 stocks given 3 states of the economy. How
will the expected return of the portfolio be computed given an economic state?
A. summation of the returns on each stock divided by 6
B. summation of the returns on each stock divided by (6 -1)
C. weighted average of the individual stock returns where the weights are based on the market value of
each of the stock positions
D. weighted average of the individual stock returns where the weights are based on the relative prices of
each stock
E. weighted average of the individual stock returns where the weights are based on the number of shares
of each stock owned
14. Which of the following portfolio values are weighted averages?
(I.) expected return
(II.) standard deviation
(III.) correlation
(IV.) beta
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I, II, and IV only
15. You own a stock which is expected to return 12 percent in a booming economy and 7 percent in a
normal economy. If the probability of a booming economy increases, your expected return will:
A. decrease.
B. either remain constant or decrease.
C. remain constant.
D. increase.
E. change but the direction of the change cannot be determined from the information given.
16. The expected risk premium on a security is computed by:
A. subtracting the security's expected return from the risk-free rate.
B. subtracting the risk-free rate from the security's expected return.
C. adding the security's expected return to the risk-free rate.
D. adding the security's expected return to the expected return on the market.
E. subtracting the expected return on the market from the security's expected return.
17. All else constant, the risk premium on a security will decrease when the:
(I.) security's expected return increases.
(II.) security's expected return decreases.
(III.) risk-free rate increases.
(IV.) risk-free rate decreases.
A. I only
B. II only
C. I and III only
D. I and IV only
E. II and III only

3
18. If the future return on a security is known with certainty, then the risk premium on that security should
be equal to:
A. zero.
B. the risk-free rate.
C. the market rate.
D. the market rate minus the risk-free rate.
E. the risk-free rate plus one-half the market rate.
19. Variance is a measure of:
A. return.
B. risk.
C. correlation.
D. diversification.
E. efficiency.
20. The expected return on a portfolio is affected by the:
(I.) choice of securities held in the portfolio.
(II.) return of each security given a particular economic state.
(III.) portfolio weight assigned to each security.
(IV.) probabilities of each economic state occurring.
A. II and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
21. The variance of a portfolio is the_____ of the variances of each of the securities held in the portfolio.
A. arithmetic average
B. geometric average
C. weighted average
D. summation
E. product
22. A particular portfolio has an expected return that is unaffected by the state of the economy. The variance
of this portfolio must:
A. be negative.
B. be less than 1.0.
C. be greater than 1.0.
D. equal 1.0.
E. equal 0.
23. As the number of stocks in a portfolio increases, the portfolio standard deviation:
A. increases at an increasing rate.
B. increases at a diminishing rate.
C. remains unchanged.
D. decreases at a diminishing rate.
E. decreases at an increasing rate.

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24. Your portfolio is invested in three securities. Stock A has a standard deviation of 14.5 percent. Stock B
has a standard deviation of 13.2 percent. Stock C has a standard deviation of 10.6 percent. You decide to
sell stock A and use the proceeds to purchase more of stock C. As a result, the standard deviation of your
portfolio:
A. will decrease.
B. will increase.
C. will remain constant.
D. will either remain constant or decrease.
E. may increase, decrease, or remain constant.
25. The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as
_____ risk.
A. market
B. diversifiable
C. nondiversifiable
D. inefficient
E. efficient
26. Nondiversifiable risk:
A. remains constant as the number of assets in a portfolio decreases.
B. can be lowered to the point of almost complete elimination.
C. is almost totally eliminated when a portfolio is increased to include at least 35 separate securities.
D. exists only if a portfolio consists of a single asset.
E. is equivalent to the level of risk found in a risk-free asset.
27. To reduce risk as much as possible, you should combine assets which have _____ correlation
coefficients.
A. strong positive
B. slightly positive
C. slightly negative
D. strongly negative
E. zero
28. If two securities are uncorrelated, they have a correlation coefficient of:
A. -100.
B. -1.
C. 0.
D. 1.
E. 100.
29. Correlation coefficients range from:
A. -100 to 100.
B. -10 to 10.
C. -1 to 1.
D. -1 to 0.
E. 0 to 1.

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30. If two assets have a perfect positive correlation, their returns will:
A. always move in the same direction by the same amount.
B. always move in the same direction but not necessarily by the same amount.
C. move randomly and independently of each other.
D. always move in opposite directions but not necessarily by the same amount.
E. always move in opposite directions by the same amount.
31. For maximum risk reduction, you should combine assets which are:
A. perfectly positively correlated.
B. positively correlated.
C. negatively correlated.
D. perfectly negatively correlated.
E. uncorrelated.
32. The returns on stock A sometimes go up, sometimes go down, and sometimes don't move at all when the
return on stock B goes up. Given this, which one of the following is most apt to be the correlation
coefficient between stocks A and B?
A. -1.5
B. -1.0
C. 0.0
D. 1.0
E. 1.5
33. The correlation between stock A and stock B is .50. The correlation between stock A and stock C is -.65
and the correlation between stock B and C is .72. Which one of the following portfolios will have the
greatest risk, all else constant?
A. 100 percent stock A
B. 100 percent stock C
C. 50 percent stock A, 50 percent stock B
D. 50 percent stock A, 50 percent stock C
E. 50 percent stock B, 50 percent stock C
34. The variance of a portfolio containing two securities will decrease when the standard deviation of either
of the securities _____ or when the correlation between those two securities _____.
A. decreases; decreases
B. decreases; increases
C. increases; decreases
D. increases; increases
E. The correlation between the two securities does not affect the portfolio variance.
35. The greater the variance of a portfolio, the:
A. lower the expected return.
B. smaller the standard deviation.
C. lower the level of risk.
D. greater the number of individual securities held.
E. the less certain the actual return.

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36. Asset allocation:
A. is insignificant in the development of a portfolio.
B. should be done without regard to correlation.
C. affects the return, but not the risk, of a portfolio.
D. affects the risk, but not the return, of a portfolio.
E. affects both the risk and the return of a portfolio.
37. You have two portfolios which contain the same securities, but in differing amounts. These two
portfolios:
A. will yield the same rate of return.
B. must be perfectly positively correlated.
C. can vary significantly in risk.
D. have identical weight distributions.
E. have the same variance.
38. The minimum variance portfolio created by combining two specified securities is the portfolio which:
A. will produce a realized yield equal to the expected return.
B. yields a constant annual return.
C. has the lowest return given a specific standard deviation.
D. has the lowest standard deviation.
E. has portfolio weights of 50/50.
39. The minimum variance portfolio lies at the _____ of an efficient frontier.
A. lowest point
B. highest point
C. most leftward point
D. most rightward point
E. exact center
40. If a minimum variance portfolio of two assets has a standard deviation of zero, the correlation between
the assets must be:
A. -1.0.
B. -0.5.
C. 0.0.
D. 0.5.
E. 1.0.
41. A portfolio with a standard deviation of _____ percent and an expected return of _____ percent is more
apt to be an efficient portfolio than a portfolio with a standard deviation of 11 percent and an expected
return of 10 percent.
A. 12; 10
B. 13; 10
C. 11; 8
D. 11; 9
E. 11; 11

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42. You are graphing an efficient frontier with the expected return on the vertical axis and the standard
deviation on the horizontal axis. A portfolio which has a variance of zero will plot:
A. at the highest point on the efficient frontier.
B. on the lowest point on the efficient frontier.
C. on the vertical axis at a value greater than 0.
D. on the horizontal axis at a value greater than 0.
E. at the intercept point of the two axes.
43. You are graphing an efficient frontier with the expected return on the vertical axis and the standard
deviation on the horizontal axis. A portfolio which has a variance of +1 will plot as a:
A. conical shape.
B. linear function with an upward slope.
C. combination of two straight lines.
D. hyperbole.
E. horizontal line.
44. A portfolio can only belong to the Markowitz efficient set of portfolios if the portfolio's _____ than that
of every other portfolio that has the same level of _____.
(I.) return is less; risk
(II.) return is greater; risk
(III.) risk level is less; return
(IV.) risk level is greater; return
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. II only
45. You combine a set of assets using different weights such that you produce the following results.

Which one of these portfolios can NOT be a Markowitz efficient portfolio?

A. A
B. B
C. C
D. D
E. E

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46. What is the expected return on this stock given the following information?

A. 8 percent
B. 10 percent
C. 12 percent
D. 14 percent
E. 16 percent
47. What is the expected return on this stock given the following information?

A. 8.00 percent
B. 9.45 percent
C. 10.50 percent
D. 11.05 percent
E. 12.55 percent
48. What is the expected return on this stock given the following information?

A. 4.55 percent
B. 5.00 percent
C. 6.75 percent
D. 8.45 percent
E. 9.05 percent

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49. What is the expected return on this stock given the following information?

A. 6.60 percent
B. 7.75 percent
C. 13.33 percent
D. 15.50 percent
E. 18.25 percent
50. The risk-free rate is 4.5 percent. The expected return on a security, given the following information, is
_____ percent and the risk premium is _____ percent.

A. 11.05; 6.55
B. 11.05; 15.55
C. 12.55; 8.05
D. 12.55; 16.25
E. 12.55; 17.05
51. The risk-free rate is 3.8 percent. The expected return on a security, given the following information, is
_____ percent and the risk premium is _____ percent.

A. 11.70; 7.90
B. 11.70; 15.50
C. 12.00; 15.80
D. 12.60; 8.80
E. 12.60; 16.40

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52. The risk-free rate is 3.6 percent. The expected return on a security, given the following information, is
_____ percent and the risk premium is _____ percent.

A. 11.60; 8.00
B. 11.60; 15.20
C. 13.00; 9.40
D. 14.50; 10.90
E. 14.50; 18.10
53. There is a 20 percent probability that a particular stock will earn an 18 percent return and an 80 percent
probability that it will earn 13 percent. What is the risk premium on this stock if the risk-free rate is 3.5
percent?
A. 8.00 percent
B. 10.50 percent
C. 13.00 percent
D. 16.00 percent
E. 17.50 percent
54. There is a 40 percent probability that a particular stock will earn an 11 percent return and a 60 percent
probability that it will earn 8 percent. What is the risk premium on this stock if the risk-free rate is 4.2
percent?
A. 4.20 percent
B. 5.00 percent
C. 9.20 percent
D. 12.00 percent
E. 13.40 percent
55. Giogio, Inc., stock has an expected return of 14.5 percent. What is the risk premium if the risk-free rate
is 4.25%?
A. 4.25 percent
B. 9.75 percent
C. 10.25 percent
D. 17.50 percent
E. 18.75 percent
56. Green Acres Farms has an expected return of 11.7 percent while the U.S. Treasury bill is expected to
return 4.3 percent. What is the risk premium on Green Acres stock?
A. 7.40 percent
B. 11.22 percent
C. 12.20 percent
D. 15.34 percent
E. 16.00 percent

11
57. What is the variance of this stock?

A. .000000
B. .000697
C. .001344
D. .002618
E. .003712
58. What is the variance on this stock?

A. .000000
B. .004200
C. .004459
D. .010682
E. .042042
59. What is the variance of a portfolio which has the following expected returns?

A. .021308
B. .021907
C. .022222
D. .027108
E. .029496

12
60. What is the variance of a portfolio which has the following expected returns?

A. .005420
B. .005467
C. .005913
D. .005515
E. .005572
61. What is the standard deviation of this stock?

A. 0.19 percent
B. 1.08 percent
C. 3.37 percent
D. 4.41 percent
E. 5.06 percent
62. What is the standard deviation of this stock?

A. 27.89 percent
B. 33.33 percent
C. 38.04 percent
D. 41.37 percent
E. 44.65 percent

13
63. What is the standard deviation of a portfolio which has the following expected returns?

A. 3.40 percent
B. 5.27 percent
C. 6.39 percent
D. 6.67 percent
E. 7.11 percent
64. What is the standard deviation of a portfolio which has the following expected returns?

A. 7.21 percent
B. 7.78 percent
C. 8.63 percent
D. 9.08 percent
E. 9.55 percent
65. A portfolio consists of the following securities. What is the portfolio weight of stock B?

A. .472
B. .479
C. .493
D. .519
E. .537

14
66. A portfolio consists of the following securities. What is the portfolio weight of stock X?

A. .377
B. .389
C. .393
D. .414
E. .422
67. Michele has a portfolio consisting of two stocks, A and B, that is valued at $36,800. Stock A is worth
$19,400. What is the portfolio weight of stock B?
A. .468
B. .473
C. .479
D. .482
E. .488
68. Randy has a portfolio consisting of two stocks, X and Y, that is valued at $47,400. Stock A is worth
$23,100. What is the portfolio weight of stock B?
A. .399
B. .437
C. .491
D. .513
E. .528
69. You have a portfolio which is comprised of 60 percent of stock A and 40 percent of stock B. What is the
expected rate of return on this portfolio?

A. 10.38 percent
B. 10.88 percent
C. 12.56 percent
D. 12.91 percent
E. 13.05 percent

15
70. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the
expected rate of return on this portfolio?

A. 7.63 percent
B. 8.87 percent
C. 9.11 percent
D. 9.28 percent
E. 9.36 percent
71. You have a portfolio which is comprised of 80 percent of stock A and 20 percent of stock B. What is the
expected rate of return on this portfolio?

A. 2.78 percent
B. 4.92 percent
C. 5.41 percent
D. 6.70 percent
E. 7.27 percent
72. You have a portfolio which is comprised of 55 percent of stock A and 45 percent of stock B. What is the
expected rate of return on this portfolio?

A. 5.99 percent
B. 7.04 percent
C. 7.67 percent
D. 9.11 percent
E. 10.80 percent

16
73. You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is the
variance of this portfolio?

A. .00511
B. .00547
C. .00558
D. .00603
E. .00624
74. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is the
variance of this portfolio?

A. .00078
B. .00313
C. .00447
D. .00518
E. .00599
75. You have a portfolio which is comprised of 20 percent of stock A and 80 percent of stock B. What is the
standard deviation of this portfolio?

A. 3.29 percent
B. 5.68 percent
C. 7.11 percent
D. 8.04 percent
E. 9.47 percent

17
76. You have a portfolio which is comprised of 60 percent of stock A and 40 percent of stock B. What is the
standard deviation of this portfolio?

A. 5.86 percent
B. 6.55 percent
C. 10.23 percent
D. 12.83 percent
E. 13.29 percent
77. You have a portfolio which is comprised of 30 percent of stock A and 70 percent of stock B. What is the
portfolio standard deviation?

A. 9.41 percent
B. 9.89 percent
C. 9.97 percent
D. 10.11 percent
E. 10.54 percent
78. You have a portfolio which is comprised of 65 percent of stock A and 35 percent of stock B. What is the
standard deviation of this portfolio?

A. 2.33 percent
B. 2.74 percent
C. 3.99 percent
D. 4.21 percent
E. 4.97 percent

18
79. Stock A has a standard deviation of 30 percent per year and stock B has a standard deviation of 20
percent per year. The correlation between stock A and stock B is .28. You have a portfolio of these two
stocks wherein stock B has a portfolio weight of 40 percent. What is your portfolio variance?
A. .04601
B. .04686
C. .04720
D. .04757
E. .04789
80. Stock X has a standard deviation of 18 percent per year and stock Y has a standard deviation of 24
percent per year. The correlation between stock A and stock B is .45. You have a portfolio of these two
stocks wherein stock Y has a portfolio weight of 35 percent. What is your portfolio variance?
A. .02855
B. .02867
C. .02901
D. .02959
E. .02994
81. Stock A has a standard deviation of 40 percent per year and stock B has a standard deviation of 10
percent per year. The correlation between stock A and stock B is .15. You have a portfolio of these two
stocks wherein stock B has a portfolio weight of 60 percent. What is your portfolio standard deviation?
A. 15.87 percent
B. 16.78 percent
C. 17.91 percent
D. 18.45 percent
E. 19.03 percent
82. Stock X has a standard deviation of 40 percent per year and stock Y has a standard deviation of 12
percent per year. The correlation between stock A and stock B is .22. You have a portfolio of these two
stocks wherein stock X has a portfolio weight of 55 percent. What is your portfolio standard deviation?
A. 22.47 percent
B. 23.33 percent
C. 23.78 percent
D. 23.84 percent
E. 23.92 percent
83. A stock fund has a standard deviation of 20 percent and a bond fund has a standard deviation of 12
percent. The correlation of the two funds is .15. The minimum variance portfolio has approximately
_____ percent invested in the stock fund and _____ percent invested in the bond fund.
A. 18; 82
B. 21; 79
C. 23; 77
D. 77; 23
E. 82; 18
84. A stock fund has a standard deviation of 30 percent and a bond fund has a standard deviation of 10
percent. The correlation of the two funds is .08. The minimum variance portfolio has _____ percent
invested in the stock fund and _____ percent invested in the bond fund.
A. 8; 92
B. 11; 89
C. 13; 87
D. 89; 11
E. 92; 8

19
85. You have done some research and found a security which has an expected return that exactly matches
your investment objective. Why should you consider the risk of this investment prior to investing your
funds?

86. Explain why changes in the economic outlook might cause an investor to change his or her asset
allocation.

87. Explain the concept and goal of portfolio diversification.

20
 ch11 Key
1. The return you anticipate earning in the future on a risky asset is called the _____ return.
A. realized
B. real
C. market
D. expected
E. actual
Jordan - Chapter 11 #1
Topic: EXPECTED RETURN
Type: DEFINITIONS

2. The combination of assets held by an investor is called a:

A. set.
B. grouping.
C. portfolio.
D. basket.
E. frontier.
Jordan - Chapter 11 #2
Topic: PORTFOLIO
Type: DEFINITIONS

3. The portfolio weight of an asset is the:

A. cost invested in that asset expressed as a percentage of the total cost of the portfolio.
B. number of shares held in that asset divided by the total number of shares owned.
C. return on the asset as a fraction of the entire return on the portfolio.
D. market value of that asset expressed as a percentage of the total portfolio value.
E. market value of that asset expressed as a percentage of the asset's initial cost.
Jordan - Chapter 11 #3
Topic: PORTFOLIO WEIGHT
Type: DEFINITIONS

4. The reduction in risk realized when a portfolio is invested in a variety of assets is called:
A. efficiency improvement.
B. risk realization.
C. frontier adjustment.
D. correlation.
E. diversification.
Jordan - Chapter 11 #4
Topic: DIVERSIFICATION
Type: DEFINITIONS

5. Correlation is the:
A. realized return expressed as a percentage of the expected return.
B. extent to which the returns on two assets move together.
C. measurement of the systematic risk contained in an asset.
D. daily return on an asset compared to its previous daily return.
E. risk of an asset measured in percentage terms.
Jordan - Chapter 11 #5
Topic: CORRELATION
Type: DEFINITIONS

1
6. The manner in which an investor spreads his or her portfolio across a variety of securities is called:
A. asset allocation.
B. the efficient frontier.
C. correlation.
D. minimization.
E. the investment opportunity set.
Jordan - Chapter 11 #6
Topic: ASSET ALLOCATION
Type: DEFINITIONS

7. The collection which represents all possible risk-return combinations which can be created from
portfolios comprised of two individual assets is called the:
A. minimum variance set.
B. financial frontier.
C. efficient portfolio.
D. investment opportunity set.
E. dominated set.
Jordan - Chapter 11 #7
Topic: INVESTMENT OPPORTUNITY SET
Type: DEFINITIONS

8. A portfolio which generates the highest possible return for a given level of risk is called the:
A. variance.
B. investment opportunity set.
C. diversified portfolio.
D. efficient portfolio.
E. financial frontier.
Jordan - Chapter 11 #8
Topic: EFFICIENT PORTFOLIO
Type: DEFINITIONS

9. The Markowitz efficient frontier is defined as the:

A. total possible risk-return combinations which can be generated from two individual assets.
B. minimum variance portfolio.
C. entire set of efficient portfolios given varying levels of risk.
D. highest level of return which can be obtained given any combination of two individual assets.
E. single most efficient portfolio which can be generated from two individual assets.
Jordan - Chapter 11 #9
Topic: MARKOWITZ EFFICIENT FRONTIER
Type: DEFINITIONS

10. The extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset
is called the:
A. portfolio adjustment.
B. diversification benefit.
C. inefficient premium.
D. expected return.
E. risk premium.
Jordan - Chapter 11 #10
Topic: RISK PREMIUM
Type: DEFINITIONS

2
11. Which one of the following statements is correct given various states of the economy?
A. Stock returns are generally not affected by the state of the economy.
B. The summation of the probabilities of the various economic states must equal 10.
C. The probabilities of the various economic states affect the expected return on a stock but not the
level of risk associated with those returns.
D. Both the risk and the return on a security are affected by the likelihood of various economic states
occurring.
E. The majority of stock returns increase as the state of the economy worsens.
Jordan - Chapter 11 #11
Topic: ECONOMIC STATES
Type: CONCEPTS

12. Which one of the following statements is correct?

A. The various economic states of the economy are generally equally likely to occur in any given
year.
B. Most stocks tend to have the same return regardless of the economic state.
C. The expected state of the economy can have a major impact on the expected return on a portfolio.
D. If the economy moves into a recessionary period from a normal period, all stocks will have lower
expected returns.
E. A change in the probability of a state of the economy occurring has no impact on the expected
return on a portfolio of risky assets.
Jordan - Chapter 11 #12
Topic: ECONOMIC STATES
Type: CONCEPTS

13. You are computing the expected return on a portfolio of 6 stocks given 3 states of the economy. How
will the expected return of the portfolio be computed given an economic state?
A. summation of the returns on each stock divided by 6
B. summation of the returns on each stock divided by (6 -1)
C. weighted average of the individual stock returns where the weights are based on the market value
of each of the stock positions
D. weighted average of the individual stock returns where the weights are based on the relative prices
of each stock
E. weighted average of the individual stock returns where the weights are based on the number of
shares of each stock owned
Jordan - Chapter 11 #13
Topic: PORTFOLIO WEIGHTS
Type: CONCEPTS

14. Which of the following portfolio values are weighted averages?

(I.) expected return
(II.) standard deviation
(III.) correlation
(IV.) beta
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I, II, and IV only
Jordan - Chapter 11 #14
Topic: PORTFOLIO WEIGHTS
Type: CONCEPTS

3
15. You own a stock which is expected to return 12 percent in a booming economy and 7 percent in a
normal economy. If the probability of a booming economy increases, your expected return will:
A. decrease.
B. either remain constant or decrease.
C. remain constant.
D. increase.
E. change but the direction of the change cannot be determined from the information given.
Jordan - Chapter 11 #15
Topic: EXPECTED RETURN
Type: CONCEPTS

16. The expected risk premium on a security is computed by:

A. subtracting the security's expected return from the risk-free rate.
B. subtracting the risk-free rate from the security's expected return.
C. adding the security's expected return to the risk-free rate.
D. adding the security's expected return to the expected return on the market.
E. subtracting the expected return on the market from the security's expected return.
Jordan - Chapter 11 #16
Topic: EXPECTED RISK PREMIUM
Type: CONCEPTS

17. All else constant, the risk premium on a security will decrease when the:
(I.) security's expected return increases.
(II.) security's expected return decreases.
(III.) risk-free rate increases.
(IV.) risk-free rate decreases.
A. I only
B. II only
C. I and III only
D. I and IV only
E. II and III only
Jordan - Chapter 11 #17
Topic: RISK PREMIUM
Type: CONCEPTS

18. If the future return on a security is known with certainty, then the risk premium on that security
should be equal to:
A. zero.
B. the risk-free rate.
C. the market rate.
D. the market rate minus the risk-free rate.
E. the risk-free rate plus one-half the market rate.
Jordan - Chapter 11 #18
Topic: RISK PREMIUM
Type: CONCEPTS

19. Variance is a measure of:

A. return.
B. risk.
C. correlation.
D. diversification.
E. efficiency.
Jordan - Chapter 11 #19
Topic: VARIANCE
Type: CONCEPTS

4
20. The expected return on a portfolio is affected by the:
(I.) choice of securities held in the portfolio.
(II.) return of each security given a particular economic state.
(III.) portfolio weight assigned to each security.
(IV.) probabilities of each economic state occurring.
A. II and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Jordan - Chapter 11 #20
Topic: PORTFOLIO RETURNS
Type: CONCEPTS

21. The variance of a portfolio is the_____ of the variances of each of the securities held in the
portfolio.
A. arithmetic average
B. geometric average
C. weighted average
D. summation
E. product
Jordan - Chapter 11 #21
Topic: PORTFOLIO VARIANCE
Type: CONCEPTS

22. A particular portfolio has an expected return that is unaffected by the state of the economy. The
variance of this portfolio must:
A. be negative.
B. be less than 1.0.
C. be greater than 1.0.
D. equal 1.0.
E. equal 0.
Jordan - Chapter 11 #22
Topic: PORTFOLIO VARIANCE
Type: CONCEPTS

23. As the number of stocks in a portfolio increases, the portfolio standard deviation:
A. increases at an increasing rate.
B. increases at a diminishing rate.
C. remains unchanged.
D. decreases at a diminishing rate.
E. decreases at an increasing rate.
Jordan - Chapter 11 #23
Topic: PORTFOLIO STANDARD DEVIATION
Type: CONCEPTS

5
24. Your portfolio is invested in three securities. Stock A has a standard deviation of 14.5 percent. Stock
B has a standard deviation of 13.2 percent. Stock C has a standard deviation of 10.6 percent. You
decide to sell stock A and use the proceeds to purchase more of stock C. As a result, the standard
deviation of your portfolio:
A. will decrease.
B. will increase.
C. will remain constant.
D. will either remain constant or decrease.
E. may increase, decrease, or remain constant.
Jordan - Chapter 11 #24
Topic: PORTFOLIO STANDARD DEVIATION
Type: CONCEPTS

25. The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as
_____ risk.
A. market
B. diversifiable
C. nondiversifiable
D. inefficient
E. efficient
Jordan - Chapter 11 #25
Topic: DIVERSIFIABLE RISK
Type: CONCEPTS

26. Nondiversifiable risk:

A. remains constant as the number of assets in a portfolio decreases.
B. can be lowered to the point of almost complete elimination.
C. is almost totally eliminated when a portfolio is increased to include at least 35 separate securities.
D. exists only if a portfolio consists of a single asset.
E. is equivalent to the level of risk found in a risk-free asset.
Jordan - Chapter 11 #26
Topic: NONDIVERSIFIABLE RISK
Type: CONCEPTS

27. To reduce risk as much as possible, you should combine assets which have _____ correlation
coefficients.
A. strong positive
B. slightly positive
C. slightly negative
D. strongly negative
E. zero
Jordan - Chapter 11 #27
Topic: CORRELATION
Type: CONCEPTS

28. If two securities are uncorrelated, they have a correlation coefficient of:
A. -100.
B. -1.
C. 0.
D. 1.
E. 100.
Jordan - Chapter 11 #28
Topic: CORRELATION
Type: CONCEPTS

6
29. Correlation coefficients range from:
A. -100 to 100.
B. -10 to 10.
C. -1 to 1.
D. -1 to 0.
E. 0 to 1.
Jordan - Chapter 11 #29
Topic: CORRELATION
Type: CONCEPTS

30. If two assets have a perfect positive correlation, their returns will:
A. always move in the same direction by the same amount.
B. always move in the same direction but not necessarily by the same amount.
C. move randomly and independently of each other.
D. always move in opposite directions but not necessarily by the same amount.
E. always move in opposite directions by the same amount.
Jordan - Chapter 11 #30
Topic: CORRELATION
Type: CONCEPTS

31. For maximum risk reduction, you should combine assets which are:
A. perfectly positively correlated.
B. positively correlated.
C. negatively correlated.
D. perfectly negatively correlated.
E. uncorrelated.
Jordan - Chapter 11 #31
Topic: CORRELATION
Type: CONCEPTS

32. The returns on stock A sometimes go up, sometimes go down, and sometimes don't move at all when
the return on stock B goes up. Given this, which one of the following is most apt to be the correlation
coefficient between stocks A and B?
A. -1.5
B. -1.0
C. 0.0
D. 1.0
E. 1.5
Jordan - Chapter 11 #32
Topic: CORRELATION
Type: CONCEPTS

33. The correlation between stock A and stock B is .50. The correlation between stock A and stock C is
-.65 and the correlation between stock B and C is .72. Which one of the following portfolios will
have the greatest risk, all else constant?
A. 100 percent stock A
B. 100 percent stock C
C. 50 percent stock A, 50 percent stock B
D. 50 percent stock A, 50 percent stock C
E. 50 percent stock B, 50 percent stock C
Jordan - Chapter 11 #33
Topic: CORRELATION
Type: CONCEPTS

7
34. The variance of a portfolio containing two securities will decrease when the standard deviation of
either of the securities _____ or when the correlation between those two securities _____.
A. decreases; decreases
B. decreases; increases
C. increases; decreases
D. increases; increases
E. The correlation between the two securities does not affect the portfolio variance.
Jordan - Chapter 11 #34
Topic: PORTFOLIO VARIANCE
Type: CONCEPTS

35. The greater the variance of a portfolio, the:

A. lower the expected return.
B. smaller the standard deviation.
C. lower the level of risk.
D. greater the number of individual securities held.
E. the less certain the actual return.
Jordan - Chapter 11 #35
Topic: PORTFOLIO VARIANCE
Type: CONCEPTS

36. Asset allocation:

A. is insignificant in the development of a portfolio.
B. should be done without regard to correlation.
C. affects the return, but not the risk, of a portfolio.
D. affects the risk, but not the return, of a portfolio.
E. affects both the risk and the return of a portfolio.
Jordan - Chapter 11 #36
Topic: ASSET ALLOCATION
Type: CONCEPTS

37. You have two portfolios which contain the same securities, but in differing amounts. These two
portfolios:
A. will yield the same rate of return.
B. must be perfectly positively correlated.
C. can vary significantly in risk.
D. have identical weight distributions.
E. have the same variance.
Jordan - Chapter 11 #37
Topic: INVESTMENT OPPORTUNITY SET
Type: CONCEPTS

38. The minimum variance portfolio created by combining two specified securities is the portfolio
which:
A. will produce a realized yield equal to the expected return.
B. yields a constant annual return.
C. has the lowest return given a specific standard deviation.
D. has the lowest standard deviation.
E. has portfolio weights of 50/50.
Jordan - Chapter 11 #38
Topic: MINIMUM VARIANCE PORTFOLIO
Type: CONCEPTS

8
39. The minimum variance portfolio lies at the _____ of an efficient frontier.
A. lowest point
B. highest point
C. most leftward point
D. most rightward point
E. exact center
Jordan - Chapter 11 #39
Topic: MINIMUM VARIANCE PORTFOLIO
Type: CONCEPTS

40. If a minimum variance portfolio of two assets has a standard deviation of zero, the correlation
between the assets must be:
A. -1.0.
B. -0.5.
C. 0.0.
D. 0.5.
E. 1.0.
Jordan - Chapter 11 #40
Topic: MINIMUM VARIANCE PORTFOLIO
Type: CONCEPTS

41. A portfolio with a standard deviation of _____ percent and an expected return of _____ percent is
more apt to be an efficient portfolio than a portfolio with a standard deviation of 11 percent and an
expected return of 10 percent.
A. 12; 10
B. 13; 10
C. 11; 8
D. 11; 9
E. 11; 11
Jordan - Chapter 11 #41
Topic: EFFICIENT PORTFOLIO
Type: CONCEPTS

42. You are graphing an efficient frontier with the expected return on the vertical axis and the standard
deviation on the horizontal axis. A portfolio which has a variance of zero will plot:
A. at the highest point on the efficient frontier.
B. on the lowest point on the efficient frontier.
C. on the vertical axis at a value greater than 0.
D. on the horizontal axis at a value greater than 0.
E. at the intercept point of the two axes.
Jordan - Chapter 11 #42
Topic: EFFICIENT FRONTIER
Type: CONCEPTS

43. You are graphing an efficient frontier with the expected return on the vertical axis and the standard
deviation on the horizontal axis. A portfolio which has a variance of +1 will plot as a:
A. conical shape.
B. linear function with an upward slope.
C. combination of two straight lines.
D. hyperbole.
E. horizontal line.
Jordan - Chapter 11 #43
Topic: EFFICIENT FRONTIER
Type: CONCEPTS

9
44. A portfolio can only belong to the Markowitz efficient set of portfolios if the portfolio's _____ than
that of every other portfolio that has the same level of _____.
(I.) return is less; risk
(II.) return is greater; risk
(III.) risk level is less; return
(IV.) risk level is greater; return
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. II only
Jordan - Chapter 11 #44
Topic: MARKOWITZ EFFICIENT PORTFOLIOS
Type: CONCEPTS

45. You combine a set of assets using different weights such that you produce the following results.

Which one of these portfolios can NOT be a Markowitz efficient portfolio?

A. A
B. B
C. C
D. D
E. E
Jordan - Chapter 11 #45
Topic: MARKOWITZ EFFICIENT PORTFOLIOS
Type: CONCEPTS

10
46. What is the expected return on this stock given the following information?

A. 8 percent
B. 10 percent
C. 12 percent
D. 14 percent
E. 16 percent

E(R) = (.60 × .28) + (.40 × -.12) = .168 - .048 = .12 = 12 percent

Jordan - Chapter 11 #46

Topic: EXPECTED RETURN AND ECONOMIC STATES
Type: PROBLEMS

47. What is the expected return on this stock given the following information?

A. 8.00 percent
B. 9.45 percent
C. 10.50 percent
D. 11.05 percent
E. 12.55 percent

E(R) = (.35 × .18) + (.50 × .11) + (.15 × -.05) = .0630 + .055 - .0075 = .1105 = 11.05 percent

Jordan - Chapter 11 #47

Topic: EXPECTED RETURN AND ECONOMIC STATES
Type: PROBLEMS

11
48. What is the expected return on this stock given the following information?

A. 4.55 percent
B. 5.00 percent
C. 6.75 percent
D. 8.45 percent
E. 9.05 percent

E(R) = (.10 × .16) + (.65 × .08) + (.25 × -.09) = .016 + .052 - .0225 = .0455 = 4.55 percent

Jordan - Chapter 11 #48

Topic: EXPECTED RETURN AND ECONOMIC STATES
Type: PROBLEMS

49. What is the expected return on this stock given the following information?

A. 6.60 percent
B. 7.75 percent
C. 13.33 percent
D. 15.50 percent
E. 18.25 percent

E(R) = (.15 × .26) + (.70 × .13) + (.15 × -.35) = .039 + .091 - .0525 = .0775 = 7.75 percent

Jordan - Chapter 11 #49

Topic: EXPECTED RETURN AND ECONOMIC STATES
Type: PROBLEMS

12
50. The risk-free rate is 4.5 percent. The expected return on a security, given the following information,
is _____ percent and the risk premium is _____ percent.

A. 11.05; 6.55
B. 11.05; 15.55
C. 12.55; 8.05
D. 12.55; 16.25
E. 12.55; 17.05

E(R) = (.35 × .18) + (.50 × .11) + (.15 × -.05) = .063 + .055 - .0075 = .1105 = 11.05 percent Risk
premium = 11.05 percent - 4.5 percent = 6.55 percent

Jordan - Chapter 11 #50

Topic: RISK PREMIUM AND EXPECTED RETURN
Type: PROBLEMS

51. The risk-free rate is 3.8 percent. The expected return on a security, given the following information,
is _____ percent and the risk premium is _____ percent.

A. 11.70; 7.90
B. 11.70; 15.50
C. 12.00; 15.80
D. 12.60; 8.80
E. 12.60; 16.40

E(R) = (.45 × .15) + (.55 × .09) = .0675 + .0495 = .117 = 11.70 percent

Jordan - Chapter 11 #51

Topic: RISK PREMIUM AND EXPECTED RETURN
Type: PROBLEMS

13
52. The risk-free rate is 3.6 percent. The expected return on a security, given the following information,
is _____ percent and the risk premium is _____ percent.

A. 11.60; 8.00
B. 11.60; 15.20
C. 13.00; 9.40
D. 14.50; 10.90
E. 14.50; 18.10

E(R) = (.20 × .17) + (.80 × .12) = .034 + .096 = .13 = 13.00 percent

Jordan - Chapter 11 #52

Topic: RISK PREMIUM AND EXPECTED RETURN
Type: PROBLEMS

53. There is a 20 percent probability that a particular stock will earn an 18 percent return and an 80
percent probability that it will earn 13 percent. What is the risk premium on this stock if the risk-free
rate is 3.5 percent?
A. 8.00 percent
B. 10.50 percent
C. 13.00 percent
D. 16.00 percent
E. 17.50 percent

E(R) = (.20 × .18) + (.80 × .13) = .036 + .104 = .14 = 14.00 percent

Jordan - Chapter 11 #53

Topic: RISK PREMIUM
Type: PROBLEMS

54. There is a 40 percent probability that a particular stock will earn an 11 percent return and a 60
percent probability that it will earn 8 percent. What is the risk premium on this stock if the risk-free
rate is 4.2 percent?
A. 4.20 percent
B. 5.00 percent
C. 9.20 percent
D. 12.00 percent
E. 13.40 percent

E(R) = (.40 × .11) + (.60 × .08) = .044 + .048 = .092 = 9.20 percent

Jordan - Chapter 11 #54

Topic: RISK PREMIUM
Type: PROBLEMS

14
55. Giogio, Inc., stock has an expected return of 14.5 percent. What is the risk premium if the risk-free
rate is 4.25%?
A. 4.25 percent
B. 9.75 percent
C. 10.25 percent
D. 17.50 percent
E. 18.75 percent

Risk premium = 14.50 percent - 4.25 percent = 10.25 percent

Jordan - Chapter 11 #55

Topic: RISK PREMIUM
Type: PROBLEMS

56. Green Acres Farms has an expected return of 11.7 percent while the U.S. Treasury bill is expected to
return 4.3 percent. What is the risk premium on Green Acres stock?
A. 7.40 percent
B. 11.22 percent
C. 12.20 percent
D. 15.34 percent
E. 16.00 percent

Risk premium = 11.70 percent - 4.30 percent = 7.40 percent

Jordan - Chapter 11 #56

Topic: RISK PREMIUM
Type: PROBLEMS

57. What is the variance of this stock?

A. .000000
B. .000697
C. .001344
D. .002618
E. .003712

E(R) = (.30 × .18) + (.70 × .10) = .054 + .07 = .124

Jordan - Chapter 11 #57

Topic: VARIANCE
Type: PROBLEMS

15
58. What is the variance on this stock?

A. .000000
B. .004200
C. .004459
D. .010682
E. .042042

E(R) = (.35 × .21) + (.65 × .07) = .0735 + .0455 = .119

Jordan - Chapter 11 #58

Topic: VARIANCE
Type: PROBLEMS

59. What is the variance of a portfolio which has the following expected returns?

A. .021308
B. .021907
C. .022222
D. .027108
E. .029496

E(R) = (.25 × .32) + (.60 × .09) + (.15 × -.24) = .08 + .054 - .036 = .098

Jordan - Chapter 11 #59

Topic: VARIANCE
Type: PROBLEMS

16
60. What is the variance of a portfolio which has the following expected returns?

A. .005420
B. .005467
C. .005913
D. .005515
E. .005572

E(R) = (.15 × .24) + (.80 × .12) + (.05 × -.14) = .036 + .096 - .007 = .125

Jordan - Chapter 11 #60

Topic: VARIANCE
Type: PROBLEMS

61. What is the standard deviation of this stock?

A. 0.19 percent
B. 1.08 percent
C. 3.37 percent
D. 4.41 percent
E. 5.06 percent

E(R) = (.40 × .21) + (.60 × .12) = .084 + .072 = .156

Jordan - Chapter 11 #61

Topic: STANDARD DEVIATION
Type: PROBLEMS

17
62. What is the standard deviation of this stock?

A. 27.89 percent
B. 33.33 percent
C. 38.04 percent
D. 41.37 percent
E. 44.65 percent

E(R) = (.30 × .65) + (.40 × .14) + (.30 × -.50) = .195 + .056 - .15 = .101

Jordan - Chapter 11 #62

Topic: STANDARD DEVIATION
Type: PROBLEMS

63. What is the standard deviation of a portfolio which has the following expected returns?

A. 3.40 percent
B. 5.27 percent
C. 6.39 percent
D. 6.67 percent
E. 7.11 percent

E(R) = (.25 × .14) + (.60 × .09) + (.15 × .03) = .035 + .054 + .0045 = .0935

Jordan - Chapter 11 #63

Topic: STANDARD DEVIATION
Type: PROBLEMS

18
64. What is the standard deviation of a portfolio which has the following expected returns?

A. 7.21 percent
B. 7.78 percent
C. 8.63 percent
D. 9.08 percent
E. 9.55 percent

E(R) = (.30 × .16) + (.50 × .11) + (.20 × -.08) = .048 + .055 - .016 = .087

Jordan - Chapter 11 #64

Topic: STANDARD DEVIATION
Type: PROBLEMS

65. A portfolio consists of the following securities. What is the portfolio weight of stock B?

A. .472
B. .479
C. .493
D. .519
E. .537

XB = (600 × $27) / [(400 × $16) + (600 × $27) + (200 × $43)] = $16,200 / ($6,400 + $16,200 + $8,600) = .5192 = .519

Jordan - Chapter 11 #65

Topic: PORTFOLIO WEIGHTS
Type: PROBLEMS

19
66. A portfolio consists of the following securities. What is the portfolio weight of stock X?

A. .377
B. .389
C. .393
D. .414
E. .422

Xx = (500 × $28) / [(500 × $28) + (800 × $15) + (300 × $37)] = $14,000 / ($14,000 + $12,000 +
$11,100) = .3774 = .377

Jordan - Chapter 11 #66

Topic: PORTFOLIO WEIGHTS
Type: PROBLEMS

67. Michele has a portfolio consisting of two stocks, A and B, that is valued at $36,800. Stock A is worth
$19,400. What is the portfolio weight of stock B?
A. .468
B. .473
C. .479
D. .482
E. .488

XB = ($36,800 - $19,400) / $36,800 = .4728 = .473

Jordan - Chapter 11 #67

Topic: PORTFOLIO WEIGHTS
Type: PROBLEMS

68. Randy has a portfolio consisting of two stocks, X and Y, that is valued at $47,400. Stock A is worth
$23,100. What is the portfolio weight of stock B?
A. .399
B. .437
C. .491
D. .513
E. .528

XY = ($47,400 - $23,100) / $47,400 = .5127 = .513

Jordan - Chapter 11 #68

Topic: PORTFOLIO WEIGHTS
Type: PROBLEMS

20
69. You have a portfolio which is comprised of 60 percent of stock A and 40 percent of stock B. What is
the expected rate of return on this portfolio?

A. 10.38 percent
B. 10.88 percent
C. 12.56 percent
D. 12.91 percent
E. 13.05 percent

E(RBoom) = (.60 × .20) + (.40 × .14) = .12 + .056 = .176

Jordan - Chapter 11 #69

Topic: PORTFOLIO EXPECTED RETURN
Type: PROBLEMS

70. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is
the expected rate of return on this portfolio?

A. 7.63 percent
B. 8.87 percent
C. 9.11 percent
D. 9.28 percent
E. 9.36 percent

E(RBoom) = (.70 × .18) + (.30 × .10) = .126 + .03 = .156

Jordan - Chapter 11 #70

Topic: PORTFOLIO EXPECTED RETURN
Type: PROBLEMS

21
71. You have a portfolio which is comprised of 80 percent of stock A and 20 percent of stock B. What is
the expected rate of return on this portfolio?

A. 2.78 percent
B. 4.92 percent
C. 5.41 percent
D. 6.70 percent
E. 7.27 percent

E(RBoom) = (.80 × .32) + (.20 × .12) = .256 + .024 = .28

Jordan - Chapter 11 #71

Topic: PORTFOLIO EXPECTED RETURN
Type: PROBLEMS

72. You have a portfolio which is comprised of 55 percent of stock A and 45 percent of stock B. What is
the expected rate of return on this portfolio?

A. 5.99 percent
B. 7.04 percent
C. 7.67 percent
D. 9.11 percent
E. 10.80 percent

E(RBoom) = (.55 × .21) + (.45 × .13) = .1155 + .0585 = .174

Jordan - Chapter 11 #72

Topic: PORTFOLIO EXPECTED RETURN
Type: PROBLEMS

22
73. You have a portfolio which is comprised of 35 percent of stock A and 65 percent of stock B. What is
the variance of this portfolio?

A. .00511
B. .00547
C. .00558
D. .00603
E. .00624

E(RNorm) = (.35 × .11) + (.65 × .14) = .0385 + .091 = .1295

Jordan - Chapter 11 #73

Topic: PORTFOLIO VARIANCE
Type: PROBLEMS

74. You have a portfolio which is comprised of 70 percent of stock A and 30 percent of stock B. What is
the variance of this portfolio?

A. .00078
B. .00313
C. .00447
D. .00518
E. .00599

E(RNorm) = (.70 × .14) + (.30 × .07) = .098 + .021 = .119

Jordan - Chapter 11 #74

Topic: PORTFOLIO VARIANCE
Type: PROBLEMS

23
75. You have a portfolio which is comprised of 20 percent of stock A and 80 percent of stock B. What is
the standard deviation of this portfolio?

A. 3.29 percent
B. 5.68 percent
C. 7.11 percent
D. 8.04 percent
E. 9.47 percent

E(RNorm) = (.20 × .13) + (.80 × .11) = .026 + .088 = .114

Jordan - Chapter 11 #75

Topic: PORTFOLIO STANDARD DEVIATION
Type: PROBLEMS

76. You have a portfolio which is comprised of 60 percent of stock A and 40 percent of stock B. What is
the standard deviation of this portfolio?

A. 5.86 percent
B. 6.55 percent
C. 10.23 percent
D. 12.83 percent
E. 13.29 percent

E(RNorm) = (.60 × .16) + (.40 × .09) = .096 + .036 = .132

Jordan - Chapter 11 #76

Topic: PORTFOLIO STANDARD DEVIATION
Type: PROBLEMS

24
77. You have a portfolio which is comprised of 30 percent of stock A and 70 percent of stock B. What is
the portfolio standard deviation?

A. 9.41 percent
B. 9.89 percent
C. 9.97 percent
D. 10.11 percent
E. 10.54 percent

E(RBoom) = (.30 × .29) + (.70 × .15) = .087 + .105 = .192

Jordan - Chapter 11 #77

Topic: PORTFOLIO STANDARD DEVIATION
Type: PROBLEMS

78. You have a portfolio which is comprised of 65 percent of stock A and 35 percent of stock B. What is
the standard deviation of this portfolio?

A. 2.33 percent
B. 2.74 percent
C. 3.99 percent
D. 4.21 percent
E. 4.97 percent

E(RBoom) = (.65 × .07) + (.35 × .18) = .0455 + .063 = .1085

Jordan - Chapter 11 #78

Topic: PORTFOLIO STANDARD DEVIATION
Type: PROBLEMS

25
79. Stock A has a standard deviation of 30 percent per year and stock B has a standard deviation of 20
percent per year. The correlation between stock A and stock B is .28. You have a portfolio of these
two stocks wherein stock B has a portfolio weight of 40 percent. What is your portfolio variance?
A. .04601
B. .04686
C. .04720
D. .04757
E. .04789

VarPort = [(1 - .40)2 × .302] + [.402 × .202] + [2 × (1 - .40) × .40 × .30 × .20 × .28]

Jordan - Chapter 11 #79

Topic: PORTFOLIO VARIANCE
Type: PROBLEMS

80. Stock X has a standard deviation of 18 percent per year and stock Y has a standard deviation of 24
percent per year. The correlation between stock A and stock B is .45. You have a portfolio of these
two stocks wherein stock Y has a portfolio weight of 35 percent. What is your portfolio variance?
A. .02855
B. .02867
C. .02901
D. .02959
E. .02994

VarPort = [(1 - .35)2 × .182] + [.352 × .242] + [2 × (1 - .35) × .35 × .18 × .24 × .45]

Jordan - Chapter 11 #80

Topic: PORTFOLIO VARIANCE
Type: PROBLEMS

81. Stock A has a standard deviation of 40 percent per year and stock B has a standard deviation of 10
percent per year. The correlation between stock A and stock B is .15. You have a portfolio of these
two stocks wherein stock B has a portfolio weight of 60 percent. What is your portfolio standard
deviation?
A. 15.87 percent
B. 16.78 percent
C. 17.91 percent
D. 18.45 percent
E. 19.03 percent

Feedback: VarPort = [(1 - .60)2 × .402] + [.602 × .102] + [2 × (1 - .60) × .60 × .40 × .10 × .15]

Jordan - Chapter 11 #81

Topic: PORTFOLIO STANDARD DEVIATION
Type: PROBLEMS

26
82. Stock X has a standard deviation of 40 percent per year and stock Y has a standard deviation of 12
percent per year. The correlation between stock A and stock B is .22. You have a portfolio of these
two stocks wherein stock X has a portfolio weight of 55 percent. What is your portfolio standard
deviation?
A. 22.47 percent
B. 23.33 percent
C. 23.78 percent
D. 23.84 percent
E. 23.92 percent

VarPort = [.552 × .402] + [(1 - .55)2 × .122] + [2 × .55 × (1 - .55) × .40 × .12 × .22]

Jordan - Chapter 11 #82

Topic: PORTFOLIO STANDARD DEVIATION
Type: PROBLEMS

83. A stock fund has a standard deviation of 20 percent and a bond fund has a standard deviation of 12
percent. The correlation of the two funds is .15. The minimum variance portfolio has approximately
_____ percent invested in the stock fund and _____ percent invested in the bond fund.
A. 18; 82
B. 21; 79
C. 23; 77
D. 77; 23
E. 82; 18
Jordan - Chapter 11 #83
Topic: MINIMUM VARIANCE PORTFOLIO
Type: PROBLEMS

84. A stock fund has a standard deviation of 30 percent and a bond fund has a standard deviation of 10
percent. The correlation of the two funds is .08. The minimum variance portfolio has _____ percent
invested in the stock fund and _____ percent invested in the bond fund.
A. 8; 92
B. 11; 89
C. 13; 87
D. 89; 11
E. 92; 8
Jordan - Chapter 11 #84
Topic: MINIMUM VARIANCE PORTFOLIO
Type: PROBLEMS

85. You have done some research and found a security which has an expected return that exactly matches
your investment objective. Why should you consider the risk of this investment prior to investing
your funds?

An expected return is just an expectation, not a guarantee. Risk is the possibility that the actual return
may differ from the expected return. By considering the investment's risk, you can get a feel for how
likely it is that the actual return may differ from the expected return and the potential extent of that
difference. It is also important to ensure that the minimal amount of risk will be taken in exchange for
the expected return.

Jordan - Chapter 11 #85

Topic: RISK AND RETURN
Type: ESSAY

27
86. Explain why changes in the economic outlook might cause an investor to change his or her asset
allocation.

Most securities perform differently given different economic states of the economy. If the economic
outlook is leaning heavily towards a boom, an investor may prefer to increase the portfolio weight of
the higher-risk securities. On the other hand, if the possibility of an economic recession is strong, an
investor may wish to reduce the portfolio weighting of high-risk securities and increase the weighting
of low-risk securities.

Jordan - Chapter 11 #86

Topic: ASSET ALLOCATION AND ECONOMIC STATES
Type: ESSAY

87. Explain the concept and goal of portfolio diversification.

Diversification entails investing in a variety of assets (minimum around 25-30) which have low
positive, or negative, correlations. The goal is to eliminate the unsystematic risk contained in a
portfolio. As an investor, you will not be compensated for unsystematic risk and thus you should not
accept that risk.

Jordan - Chapter 11 #87

Topic: DIVERSIFICATION
Type: ESSAY

28
 ch11 Summary
Category # of Questions
Jordan - Chapter 11 87
Topic: ASSET ALLOCATION 2
Topic: ASSET ALLOCATION AND ECONOMIC STATES 1
Topic: CORRELATION 8
Topic: DIVERSIFIABLE RISK 1
Topic: DIVERSIFICATION 2
Topic: ECONOMIC STATES 2
Topic: EFFICIENT FRONTIER 2
Topic: EFFICIENT PORTFOLIO 2
Topic: EXPECTED RETURN 2
Topic: EXPECTED RETURN AND ECONOMIC STATES 4
Topic: EXPECTED RISK PREMIUM 1
Topic: INVESTMENT OPPORTUNITY SET 2
Topic: MARKOWITZ EFFICIENT FRONTIER 1
Topic: MARKOWITZ EFFICIENT PORTFOLIOS 2
Topic: MINIMUM VARIANCE PORTFOLIO 5
Topic: NONDIVERSIFIABLE RISK 1
Topic: PORTFOLIO 1
Topic: PORTFOLIO EXPECTED RETURN 4
Topic: PORTFOLIO RETURNS 1
Topic: PORTFOLIO STANDARD DEVIATION 8
Topic: PORTFOLIO VARIANCE 8
Topic: PORTFOLIO WEIGHT 1
Topic: PORTFOLIO WEIGHTS 6
Topic: RISK AND RETURN 1
Topic: RISK PREMIUM 7
Topic: RISK PREMIUM AND EXPECTED RETURN 3
Topic: STANDARD DEVIATION 4
Topic: VARIANCE 5
Type: CONCEPTS 35
Type: DEFINITIONS 10
Type: ESSAY 3
Type: PROBLEMS 39