Chapter 07
Optimal Risky Portfolios
Multiple Choice Questions
1. Market risk is also referred to as
A. systematic risk, diversifiable risk.
B. systematic risk, nondiversifiable risk.
C. unique risk, nondiversifiable risk.
D. unique risk, diversifiable risk.
2. Systematic risk is also referred to as
A. market risk, nondiversifiable risk.
B. market risk, diversifiable risk.
C. unique risk, nondiversifiable risk.
D. unique risk, diversifiable risk.
E. None of the options
7-1
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3. Nondiversifiable risk is also referred to as
A. systematic risk, unique risk.
B. systematic risk, market risk.
C. unique risk, market risk.
D. unique risk, firm-specific risk.
4. Diversifiable risk is also referred to as
A. systematic risk, unique risk.
B. systematic risk, market risk.
C. unique risk, market risk.
D. unique risk, firm-specific risk.
5. Unique risk is also referred to as
A. systematic risk, diversifiable risk.
B. systematic risk, market risk.
C. diversifiable risk, market risk.
D. diversifiable risk, firm-specific risk.
E. None of the options
7-2
Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
6. Firm-specific risk is also referred to as
A. systematic risk, diversifiable risk.
B. systematic risk, market risk.
C. diversifiable risk, market risk.
D. diversifiable risk, unique risk.
7. Nonsystematic risk is also referred to as
A. market risk, diversifiable risk.
B. firm-specific risk, market risk.
C. diversifiable risk, market risk.
D. diversifiable risk, unique risk.
8. The risk that can be diversified away is
A. firm specific risk.
B. beta.
C. systematic risk.
D. market risk.
9. The risk that cannot be diversified away is
A. firm-specific risk.
B. unique.
C. nonsystematic risk.
D. market risk.
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Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10. The variance of a portfolio of risky securities
A. is a weighted sum of the securities' variances.
B. is the sum of the securities' variances.
C. is the weighted sum of the securities' variances and covariances.
D. is the sum of the securities' covariances.
E. None of the options
11. The standard deviation of a portfolio of risky securities is
A. the square root of the weighted sum of the securities' variances.
B. the square root of the sum of the securities' variances.
C. the square root of the weighted sum of the securities' variances and covariances.
D. the square root of the sum of the securities' covariances.
12. The expected return of a portfolio of risky securities
A. is a weighted average of the securities' returns.
B. is the sum of the securities' returns.
C. is the weighted sum of the securities' variances and covariances.
D. is a weighted average of the securities' returns and the weighted sum of the securities' variances and covariances.
E. None of the options
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Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
13. Other things equal, diversification is most effective when
A. securities' returns are uncorrelated.
B. securities' returns are positively correlated.
C. securities' returns are high.
D. securities' returns are negatively correlated.
E. securities' returns are positively correlated and high.
14. The efficient frontier of risky assets is
A. the portion of the investment opportunity set that lies above the global minimum variance portfolio.
B. the portion of the investment opportunity set that represents the highest standard deviations.
C. the portion of the investment opportunity set that includes the portfolios with the lowest standard deviation.
D. the set of portfolios that have zero standard deviation.
15. The capital allocation line provided by a risk-free security and N risky securities is
A. the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities.
B. the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier.
C. the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.
D. the horizontal line drawn from the risk-free rate.
7-5
Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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