The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%.  The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.

Answer:  TRUE

The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

Answer:  FALSE

When assets are positively correlated, they tend to rise or fall together.

Answer:  TRUE

The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

Answer:  FALSE

A correlation coefficient of +1 indicates that returns on one asset can be exactly predicted from the returns on another asset.

Answer:  TRUE

Adequate portfolio diversification can be achieved by investing in several companies in the same industry.

Answer:  FALSE

A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

Answer:  TRUE

Most financial assets have correlation coefficients between 0 and 1.

Answer:  TRUE

Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.

Answer:  FALSE

When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.

Answer:  FALSE

A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

Answer:  TRUE

An asset with a large standard deviation of returns can lower portfolio risk if its returns are uncorrelated with the returns on the other assets in the portfolio.

Answer:  TRUE

The greater the dispersion of possible returns, the riskier is the investment.

Answer:  TRUE

For the most part, there has been a positive relation between risk and return historically.

Answer:  TRUE

The benefit from diversification is far greater when the diversification occurs across asset types.

Answer:  TRUE

Investing in foreign stocks is one way to improve diversification of a portfolio.

Answer:  TRUE

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?

a. Annual preferred dividend
b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate


Answer: Annual preferred dividend

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are

a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.


Answer: considered outstanding at the beginning of the earliest year reported

In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the

a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.


Answer: none of these