Fundamentals Of Investments 8th Edition By Bradford Jordan – Test Bank

Chapter 11 Diversification and Risky Asset Allocation

1) Which one of the following returns is the average return you expect to earn in the future on a risky asset?
A) realized return
B) expected return
C) market return
D) real return
E) adjusted return

Answer: B
Explanation: See Section 11.1
Difficulty: 1 Easy
Section: 11.1 Expected Returns and Variances
Topic: Expected return
Learning Objective: 11-01 How to calculate expected returns and variances for a security.
Bloom’s: Remember
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2) What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called?
A) efficient return
B) correlated value
C) risk premium
D) expected return
E) realized return

Answer: C
Explanation: See Section 11.1
Difficulty: 1 Easy
Section: 11.1 Expected Returns and Variances
Topic: Risk premiums
Learning Objective: 11-01 How to calculate expected returns and variances for a security.
Bloom’s: Remember
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3) A group of stocks and bonds held by an investor is called which one of the following?
A) weights
B) grouping
C) basket
D) portfolio
E) bundle

Answer: D
Explanation: See Section 11.2
Difficulty: 1 Easy
Section: 11.2 Portfolios
Topic: Portfolio construction
Learning Objective: 11-02 How to calculate expected returns and variances for a portfolio.
Bloom’s: Remember
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4) The value of an individual security divided by the total value of the portfolio is referred to as the portfolio:
A) beta.
B) standard deviation.
C) balance.
D) weight.
E) variance.

Answer: D
Explanation: See Section 11.2
Difficulty: 1 Easy
Section: 11.2 Portfolios
Topic: Portfolio weights
Learning Objective: 11-02 How to calculate expected returns and variances for a portfolio.
Bloom’s: Remember
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5) Diversification is investing in a variety of assets with which one of the following as the primary goal?
A) increasing returns
B) minimizing taxes
C) reducing some risks
D) eliminating all risks
E) increasing the variance

Answer: C
Explanation: See Section 11.3
Difficulty: 1 Easy
Section: 11.3 Diversification and Portfolio Risk
Topic: Diversification
Learning Objective: 11-03 The importance of portfolio diversification.
Bloom’s: Remember
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6) Correlation is the:
A) squared measure of a security’s total risk.
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) spreading of an investment across a number of assets.

Answer: B
Explanation: See Section 11.4
Difficulty: 1 Easy
Section: 11.4 Correlation and Diversification
Topic: Diversification measures
Learning Objective: 11-03 The importance of portfolio diversification.
Bloom’s: Remember
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7) The division of a portfolio’s dollars among various types of assets is referred to as:
A) the minimum variance portfolio.
B) the efficient frontier.
C) correlation.
D) asset allocation.
E) setting the investment opportunities.

Answer: D
Explanation: See Section 11.4
Difficulty: 1 Easy
Section: 11.4 Correlation and Diversification
Topic: Asset allocation and security selection
Learning Objective: 11-04 The efficient frontier and the importance of asset allocation.
Bloom’s: Remember
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8) Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?
A) minimum variance set
B) financial frontier
C) efficient portfolio
D) allocated set
E) investment opportunity set

Answer: E
Explanation: See Section 11.4
Difficulty: 1 Easy
Section: 11.4 Correlation and Diversification
Topic: Opportunity sets
Learning Objective: 11-04 The efficient frontier and the importance of asset allocation.
Bloom’s: Remember
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9) An efficient portfolio is a portfolio that does which one of the following?
A) offers the highest return for the lowest possible cost
B) provides an evenly weighted portfolio of diverse assets
C) eliminates all risk while providing an expected positive rate of return
D) lies on the vertical axis when graphing expected returns against standard deviation
E) offers the highest return for a given level of risk

Answer: E
Explanation: See Section 11.4
Difficulty: 1 Easy
Section: 11.4 Correlation and Diversification
Topic: Efficient frontier
Learning Objective: 11-04 The efficient frontier and the importance of asset allocation.
Bloom’s: Remember
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10) Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?
A) minimum variance portfolio
B) Markowitz efficient frontier
C) correlated market frontier
D) asset allocation relationship
E) diversified portfolio line

Answer: B
Explanation: See Section 11.4
Difficulty: 1 Easy
Section: 11.5 The Markowitz Efficient Frontier
Topic: Efficient frontier
Learning Objective: 11-04 The efficient frontier and the importance of asset allocation.
Bloom’s: Remember
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