1. Diversification is least effective when security returns are _________.

   1. high

   2. negatively correlated

   3. positively correlated

   4. uncorrelated

2. Diversification can reduce or eliminate __________ risk.

   A. all B. systematic C. idiosyncratic D. market

3. In a well-diversified portfolio, __________ risk is negligible.

   A. nondiversifiable B. firm-specific C. systematic D. market

4. The excess return is the _________.

   1. rate of return in excess of the riskfree rate

   2. rate of return that can be earned with certainty

   3. rate of return to risk aversion

   4. index return

1

5. A portfolio with a 5% standard deviation generated a return of 10% last year when T- bills were paying 4%. This portfolio had a Sharpe ratio of ____.

   A. 1.2 B. 1.6 C. 1.8 D. 2.5

6. Bonds rated _____ or better by Standard & Poor's are considered investment grade.

   A. AA B. BBB C. BB D. CCC

7. Consider an investment opportunity set formed with two securities that are not perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.

   1. equal to the sum of the securities' standard deviations

   2. equalto-1

   3. equal to 0

   4. greater than 0

8. The term complete portfolio refers to a portfolio consisting of _________________.

   1. the market portfolio combined with the minimum-variance portfolio

   2. the risk-free asset combined with at least one risky asset

   3. securities from domestic markets combined with securities from foreign markets

   4. common stocks combined with bonds