Corporate Finance test bank with explanation all answer

Use the table for the question(s) below.

Consider the following covariances between securities:

	Duke	Microsoft	Wal-Mart
Duke	0.0568	-0.0193	0.0037
Microsoft	-0.0193	0.2420	0.1277
Wal-Mart	0.0037	0.1277	0.1413

17) The variance on a portfolio that is made up of equal investments in Duke Energy and Microsoft stock is closest to:

A) .065

B) 0.090

C) .149

D) -0.020

18) The variance on a portfolio that is made up of a $6000 investments in Duke Energy and a $4000 investment in Wal-Mart stock is closest to:

A) .050

B) .045

C) .051

D) -0.020

Use the table for the question(s) below.

Consider the following returns:

Year End	Stock X Realized Return	Stock Y Realized Return	Stock Z Realized Return
2004	20.1%	-14.6%	0.2%
2005	72.7%	4.3%	-3.2%
2006	-25.7%	-58.1%	-27.0%
2007	56.9%	71.1%	27.9%
2008	6.7%	17.3%	-5.1%
2009	17.9%	0.9%	-11.3%

19) Calculate the covariance between Stock Y's and Stock Z's returns.

20) Calculate the correlation between Stock Y's and Stock Z's returns.

21) Calculate the variance on a portfolio that is made up of equal investments in Stock Y and Stock Z stock.

Answer:

Use the table for the question(s) below.

Consider the following covariances between securities:

	Duke	Microsoft	Wal-Mart
Duke	0.0568	-0.0193	0.0037
Microsoft	-0.0193	0.2420	0.1277
Wal-Mart	0.0037	0.1277	0.1413

22) The variance on a portfolio that is made up of a $6000 investments in Microsoft and a $4000 investment in Wal-Mart stock is closest to:

1) Which of the following statements is false?

A) The variance of a portfolio is equal to the weighted average correlation of each stock within the portfolio.

B) The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights.

C) The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio.

D) The volatility declines as the number of stocks in a portfolio grows.

2) Which of the following statements is false?

A) The volatility declines as the number of stocks in a portfolio grows.

B) An equally weighted portfolio is a portfolio in which the same amount is invested in each stock.

C) As the number of stocks in a portfolio grows large, the variance of the portfolio is determined primarily by the average covariance among the stocks.

D) When combining stocks into a portfolio that puts positive weight on each stock, unless all of the stocks are uncorrelated with the portfolio, the risk of the portfolio will be lower than the weighted average volatility of the individual stocks.

3) Which of the following statements is false?

A) The expected return of a portfolio is equal to the weighted average expected return, but the volatility of a portfolio is less than the weighted average volatility.

B) Each security contributes to the volatility of the portfolio according to its volatility, scaled by its covariance with the portfolio, which adjusts for the fraction of the total risk that is common to the portfolio.

C) Nearly half of the volatility of individual stocks can be eliminated in a large portfolio as a result of diversification.

D) The overall variability of the portfolio depends on the total co-movement of the stocks within it.

4) Which of the following formulas is incorrect?

A) Variance of an equally Weighted Portfolio = (Average Variance of Individual Stocks) (Average covariance between the stocks)

B) Variance of a portfolio =

C) Variance of a portfolio =

D) Variance of a portfolio =

5) Consider an equally weighted portfolio that contains five stocks. If the average volatility of these stocks is 40% and the average correlation between the stocks is .5, then the volatility of this equally weighted portfolio is closest to:

A) .17

B) .44

C) .41

D) .19

6) Consider an equally weighted portfolio that contains 20 stocks. If the average volatility of these stocks is 35% and the average correlation between the stocks is .4, then the volatility of this equally weighted portfolio is closest to:

A) .17

B) .41

C) .14

D) .37

7) Consider an equally weighted portfolio that contains 100 stocks. If the average volatility of these stocks is 50% and the average correlation between the stocks is .7, then the volatility of this equally weighted portfolio is closest to:

A) .72

B) .63

C) .40

D) .50

Use the table for the question(s) below.

Consider the following covariances between securities:

	Duke	Microsoft	Wal-Mart
Duke	0.0568	-0.0193	0.0037
Microsoft	-0.0193	0.2420	0.1277
Wal-Mart	0.0037	0.1277	0.1413

8) What is the variance on a portfolio that has $2000 invested in Duke Energy, $3000 invested in Microsoft, and $5000 invested in Wal-Mart stock?

9) What is the variance on a portfolio that has $3000 invested in Duke Energy, $4000 invested in Microsoft, and $3000 invested in Wal-Mart stock?

11.4 Risk Versus Return: Choosing an Efficient Portfolio

1) Which of the following statements is false?

A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility.

B) We can rule out inefficient portfolios because they represent inferior investment choices.

C) The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio.

D) Correlation has no effect on the expected return on a portfolio.

2) Which of the following statements is false?

A) When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them.

B) An investor seeking high returns and low volatility should only invest in an efficient portfolio.

C) When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification.

D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

3) Which of the following statements is false?

A) We say a portfolio is long those stocks that have negative portfolio weights.

B) The efficient portfolios are those portfolios offering the highest possible expected return for a given level of volatility.

C) When two stocks are perfectly negatively correlated, it becomes possible to hold a portfolio that bears absolutely no risk.

D) The lower the correlation of the securities in a portfolio the lower the volatility we can obtain.

4) Which of the following statements is false?

A) A short sale is a transaction in which you buy a stock that you do not own and then agree to sell that stock back in the future.

B) The efficient portfolios are those portfolios offering the lowest possible level of volatility for a given level of expected return.

C) A positive investment in a security can be referred to as a long position in the security.

D) It is possible to invest a negative amount in a stock or security call a short position.