1)1.If the covariance of Stock A with Stock B is .20, then what is the covariance of Stock B with Stock A?

a) 0.2

b) 0.8

c) 5

d) 4

-1.2

2).Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession. Stock B is expected to return 11 percent in a normal economy and 5 percent in a recession. The probability of the economy being normal is 75 percent with a 25 percent probability of a recession. What is the covariance of these two securities?

a) 0.007006

b) 0.006563

c) 0.00518

d) 0.007309

e) 0.006274

3)The beta of a security is calculated by dividing the:

a)covariance of the security return with the market return by the variance of the market.

b) correlation of the security return with the market return by the variance of the market.

c) variance of the market by the covariance of the security return with the market return.

d) variance of the market return by the correlation of the security return with the market return.

e) covariance of the security return with the market return by the correlation of the security and market returns.

4)The principle of diversification tells us that:

a) concentrating an investment in two or three large stocks will eliminate all of your risk.

b) concentrating an investment in three companies all within the same industry will greatly reduce your overall risk.

c)spreading an investment across five diverse companies will not lower your overall risk at all.

d)spreading an investment across many diverse assets will eliminate all of the risk.

e)spreading an investment across many diverse assets will eliminate idiosyncratic risk.