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##### Corporate Finance test bank with explanation all answer

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Question;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.

Paper#49440 | Written in 18-Jul-2015

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