Sophia Finance Milestone 3_Complete Questions and Answers (Latest 2021/2022)

Sophia Principles of Finance Milestone 3 1 Which of the following is true of portfolio diversification? A diversified portfolio containing positively correlated investments has a higher variance than a portfolio containing a single asset type. A diversified portfolio containing negatively correlated investments has a lower variance than a portfolio containing a single asset type. A diversified portfolio containing positively correlated investments has a lower variance than a portfolio containing a single asset type. A diversified portfolio containing negatively correlated investments has a higher variance than a portfolio containing a single asset type. CONCEPT Portfolio Considerations 2 A security that falls below the security market line has __________. a high expected return and a high price a low expected return and a high price a low expected return and a low price a high expected return and a low price CONCEPT Understanding the Security Market Line 3 You own a small manufacturing business that produces widgets. You have spent $100,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $4 to make and they sell for $22 each, so your variable cost is 18.2% of the overall revenue. At your current level of operating leverage, how many widgets must you sell to break even? 4,546 18,200 5,556 9,450 CONCEPT Thinking About Operating Leverage 4 The risk that your investment will lose value because your return is dependant on the stability of a secondary investment is known as __________. prepayment risk model risk liquidity risk asset-backed risk CONCEPT Risk 5 Which of the following portfolios theoretically diversifies away the most risk? One whose investments have a large covariance One whose investments are highly correlated One whose investments have zero correlation One whose investments have a negative covariance