1. The covariance of two stocks was calculated at -.01733. If the standard deviation of the first stock is .106 and .164 for the second, determine the correlation.

A. -.997

B. -.887

C. -.687

D. -.587

Explanation:

2. From a historical perspective (1926-2014), what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?

A. 8.5 percent

B. 12.5 percent

C. 14.5 percent

D. 19.5 percent

3. Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _____ stocks.

A. 2

B. 5

C. 20

D. 50

Explanation:

4. In a year in which common stocks offered an average return of 18 percent, Treasury bonds offered 10 percent and Treasury bills offered 7 percent, the risk premium for common stocks was:

A. 1 percent.

B. 3 percent.

C. 8 percent.

D. 11 percent.

Explanation: