problem 1: For an investor with a time horizon of 6 to 10 years and lower risk tolerance, a suitable asset allocation strategy would be:

a) 100% stocks.
b) 100% cash.
c) 30% cash, 50% bonds, and 20% stocks.
d) 10% cash, 30% bonds, and 60% stocks.
e) 100% bonds.

problem 2: For an investor with a time horizon of 6 to 10 years and higher risk tolerance, a suitable asset allocation strategy would be:

a) 100% stocks.
b) 100% cash.
c) 30% cash, 50% bonds, and 20% stocks.
d) 10% cash, 30% bonds, and 60% stocks.
e) 100% bonds.

problem 3: If you are considering investing in German stocks as a means to decrease the risk of your portfolio, the initial factor which you must examine is:

a) The average rate of return of the portfolio when you combine U.S. and German stocks.
b) The standard deviation of the German stocks.
c) The standard deviation of the German stocks compared to the standard deviation of U.S. stocks.
d) The correlation between the rates of return for German stocks and U.S. stocks.
e) The coefficient of variation (CV) of rates of return for German stocks versus the CV of rates of return for U.S. stocks.

problem 4: The correlation between U.S. equities and U.S. government bonds is:

a) Strongly positive.
b) Weakly Positive.
c) Strongly Negative.
d) Weakly Negative.
e) Indeterminate.

problem 5: In order to diversify risk an investor should have investments which have correlations with other investments in the portfolio that are:

a) Low positive.
b) Zero.
c) Negative.
d) Any of the above.
e) None of the above.

problem 6: If the real return for corporate bonds was 4% and the inflation rate was 2%, what is the nominal return for corporate bonds?

a) 1.96%
b) 2.00%
c) 4.00%
d) 6.08%
e) 6.42%

problem 7: The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement altogether.

a) Absolute.
b) Relative.
c) Indexed.
d) Loglinear.
e) Squared.

problem 8: In a two-stock portfolio, if the correlation coefficient between two stocks were to decrease over time everything else remaining constant the portfolio's risk would:

a) Decrease.
b) Remain constant.
c) Increase.
d) Fluctuate positively and negatively.
e) Be a negative value.

problem 9: A portfolio is considered to be proficient if:

a) No other portfolio provides higher expected returns with the same risk.
b) No other portfolio provides lower risk with similar expected return.
c) There is no portfolio with a higher return.
d) Choices a and b.
e) All of the above.

problem 10: The optimal portfolio is recognized at the point of tangency between the efficient frontier and the:

a) Highest possible utility curve.
b) Lowest possible utility curve.
c) Middle range utility curve.
d) Steepest utility curve.
e) Flattest utility curve.