5 Written questions
5 Matching questions
- 25. Rational risk-averse investors will always prefer portfolios ______________.
a. Located on the efficient frontier to those located on the capital market line
b. Located on the capital market line to those located on the efficient frontier
c. At or near the minimum variance point on the efficient frontier
d. That are risk-free to all other asset choices
- 47. As additional securities are added to a portfolio, total risk will generally ________ at a _________ rate.
a. Rise; decreasing
b. Rise; increasing
c. Fall; decreasing
d. Fall; increasing
- 48. According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and ___________.
a. Identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return tradeoffs
b. Identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile
c. Identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion
d. Choosing which risky assets an investor prefers according to their risk aversion level; minimizing the CAL by lending at the risk-free rate
- 57. According to Markowitz and other proponents of modern portfolio theory which of the following activities would not be expected to produce any benefits?
b. Investing in Treasury bills
c. Investing in stocks of utility companies
d. Engaging in active portfolio management to enhance returns
- 15. To eliminate the bias in calculating the variance and covariance of returns from historical data the average squared deviation must be multiplied by __________.
a. N / (n-1)
b. N * (n-1)
c. (n-1) / n
d. (n-1) * n
- a D. Engaging in active portfolio management to enhance returns
- b B. Located on the capital market line to those located on the efficient frontier
- c A. N / (n-1)
- d C. Identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion
- e D. Fall; increasing
5 Multiple choice questions
- C. The Federal Reserve increases interest rates 50 basis points
- C. 1.32
- B. Correlation coefficient
- A. The risk-free asset combined with at least one risky asset
- A. Stock's standard deviation
5 True/False questions
56. Diversification can reduce or eliminate __________ risk.
d. Only an insignificant → B. Firm specific risk
32. Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return 10% and a standard deviation of return of 30%. The weight of security B in the global minimum variance is __________.
d. 60% → C. 40%
85. Which stock is riskier for an investor currently holding his portfolio in a well diversified portfolio of common stock?
a. Stock A is riskier
b. Stock B is riskier
c. Both stocks are equally risky
d. You cannot tell from the information given → B. Stock B is riskier
4. Based on the outcomes in the table below choose which of the statements is/are correct:
I. The covariance of Security A and Security B is zero
II. The correlation coefficient between Security A and C is negative
III. The correlation coefficient between Security B and C is positive
a. I only
b. I and II only
c. II and III only
d. I, II and III → B. Standard deviation
72. Which of the following correlation coefficients will produce the most diversification benefits?
d. 0.4 → C. 0.0