1. The diversification effect of a portfolio of two stocks: .

A. increases as the correlation between the stocks declines. B. increases as the correlation between the stocks rises. C. decreases as the correlation between the stocks rises. D. Both A and C. E. None of the above.

2.

Irene Adler is considering investing in the common stock of Holmes and Watson. The following data are available for the two securities.

.

................... Expected Return ..... Standard Deviation

Holmes .............. 0.12 ......................... 0.08

Watson ............. 0.19 .......................... 0.25

.

If she invests 60% of her funds Holmes and 40% in Watson, and if the correlation of returns between these two securities is 0.45, what is the portfolios expected return and standard deviation?

.

	A.	14.8% and 12.89%
	B.	13.6% and 11.03%
	C.	14.6% and 13.94%
	D.	14.4% and 11.03%
	E.	13.21% and 10.08%

3. What does a security bring to the risk of a well diversified portfolio?

.

	A.	It brings its standard deviation of possible returns.
	B.	It brings its covariance with the other securities in the portfolio.
	C.	It brings its total risk.
	D.	It brings its unsystematic risk.

4.

Diversification can effectively reduce risk. Once a portfolio is diversified, the type of risk remaining is:

.

	A.	individual security risk.
	B.	riskless security risk.
	C.	unsystematic risk
	D.	systematic risk

5.

Efficient portfolios are those, which offer:

.

	A.	Highest expected return for a given level of risk
	B.	Highest risk for a given level of expected return
	C.	The maximum risk and expected return
	D.	All of the above