Question 6.6. Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1.

Stock	Expected Return	Standard Deviation	Beta
A	10%	20%	1.0
B	10%	10%	1.0
C	12%	12%	1.4

Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT? (Points : 0.1)

A. Portfolio AB has a standard deviation of 20%. B. Portfolio AB's coefficient of variation is greater than 2.0. C. Portfolio AB's required return is greater than the required return on Stock A. D. Portfolio ABC's expected return is 10.66667%. E. Portfolio ABC has a standard deviation of 20%.

Question 7.7. Over the past 84 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last? (Points : 0.1)

A. Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills. B. Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds. C. Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. D. U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks. E. Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.

Question 8.8. When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk. (Points : 0.1)

A. True B. False

Question 9.9. Diversification will normally reduce the riskiness of a portfolio of stocks. (Points : 0.1)

A. True B. False

Question 10.10. In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data. (Points : 0.1)

A. True B. False