Deck 8: Portfolio Selection

Question 1

Different investors will estimate the inputs to the Markowitz model differently because:

A)every investor has his/her own risk/return preferences
B)every investor has access to different information about securities
C)there is an inherent uncertainty in security analysis
D)there is a random selection process used by individual investors

Answer 1

C

Question 2

Under the Markowitz model,investors:

A)are assumed to be risk-seekers
B)are not allowed to use leverage
C)are assumed to be institutional investors
D)are always better off if they select portfolios consisting of multiple securities

Answer 2

B

Question 3

The benefits of international diversification have ________since 1995.

A)increased
B)decreased
C)disappeared
D)become more volatile

Answer 3

B

Question 4

Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by

A)aggressive investors
B)conservative investors
C)risk-averse investors
D)defensive investors

Question 5

Choose the portfolio from the following set that is not on the efficient frontier.

A)A: expected return of 10 percent; standard deviation of 8 percent
B)B: expected return of 18 percent; standard deviation of 13 percent
C)C: expected return of 38 percent; standard deviation of 38 percent
D)D: expected return of 15 percent; standard deviation of 14 percent

Question 6

When the Markowitz model assumes that most investors are considered to be "risk averse",this really means that they:

A)will not take a "fair gamble"
B)will take a "fair gamble"
C)will take a "fair gamble" fifty percent of the time
D)will never assume investment risk

Question 7

As a measure of market risk,the beta for the S&P 500 is generally considered to be:

A)-1.0
B)1.0
C)0
D)impossible to determine

Question 8

According to Markowitz,rational investors will seek efficient portfolios because these portfolios are optimal based on:

A)expected return.
B)risk.
C)expected return and risk.
D)transactions costs.

Question 9

Which of the following is not true regarding the Markowitz theory?

A)Markowitz portfolio theory is considered a three-parameter model
B)Under the Markowitz model,no portfolio on the efficient frontier dominates any other portfolio on the efficient frontier
C)The Markowitz model is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks
D)Markowitz portfolio theory is a multi-period model generates an entire set,or efficient frontier,of portfolios

Question 10

Which of the following statements regarding indifference curves is not true?

A)Investors have a finite number of indifference curves
B)The greater the slope of the indifference curve,the greater the risk aversion of investors
C)The indifference curves for all risk-averse investors will be upward sloping
D)Indifference curves cannot intersect

Question 11

According to Markowitz,an efficient portfolio is one that has the

A)largest expected return for the smallest level of risk
B)largest expected return and zero risk
C)largest expected return for a given level of risk
D)smallest level of risk

Question 12

Which of the following is not one of the assumptions of portfolio theory?

A)Liquidity of positions
B)Investor preferences are based only on expected return and risk
C)Low transactions costs
D)A single investment period

Question 13

A portfolio which lies below the efficient frontier is described as

A)optimal
B)unattainable
C)dominant
D)dominated

Question 14

Which of the following is true regarding the Markowitz Model as covered in this chapter?

A)It fully addresses the use of leverage
B)Investors must have homogeneous expectations about model parameters
C)Investors must be better off if they invest in portfolios to the Northwest of the efficient frontier
D)Markowitz diversification is inefficient diversification

Question 15

Indifference curves:

A)always curve to the left
B)have a positive slope
C)cannot intersect
D)are convex

Question 16

Indifference curves reflect -------------- while the efficient set of portfolios represent ---------------.

A)portfolio possibilities; investor preferences.
B)investor preferences; portfolio possibilities.
C)portfolio return; investor risk.
D)investor preferences; portfolio return.

Question 17

An indifference curve shows:

A)the one most desirable portfolio for a particular investor
B)all combinations of portfolios that are equally desirable to a particular investor
C)all combinations of portfolios that are equally desirable to all investors
D)the one most desirable portfolio for all investors

Question 18

The optimal portfolio for a risk-averse investor:

A)cannot be determined
B)occurs at the point of tangency between the highest indifference curve and the highest expected return
C)occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios
D)occurs at the point of tangency between the highest expected return and lowest risk efficient portfolios

Question 19

The single index model divides a security's return into _______ and ________ parts.

A)supply; demand
B)control; non-control
C)company-related; industry-related
D)micro; macro

Question 20

The optimal portfolio is the efficient portfolio with the

A)lowest risk
B)highest risk
C)highest utility
D)least investment

Question 21

Because of increasing correlation between U.S.markets and foreign markets,most professional investors now recommend:

A)zero exposure to foreign markets for the foreseeable future
B)replacing foreign stock exposure with U.S.Treasury bonds
C)maintaining some reasonable exposure to foreign markets
D)replacing foreign stock exposure with sovereign debt from investment grade countries.

Question 22

The single index model requires (3n+2)total pieces of data to implement.

Question 23

Markowitz derived the efficient frontier as an upward-sloping straight line.

Question 24

An international index commonly used as a proxy for international equities that correlates approximately 80 percent with the S&P 500:

A)MSCI EAFE Index
B)MSCI Emerging Markets Index
C)Russell 1000 Index
D)FTSE NAREIT Index

Question 25

The S&P 500 typically is usually correlated at what percent with the MSCI EAFE Index

A)70%
B)80%
C)90%
D)95%

Question 26

Systematic risk is also called:

A)diversifiable risk
B)market risk
C)random risk
D)company-specific risk

Question 27

Under the Multi-Index Model,the industry relationship to stock prices would be assessed by the:

A)market factor
B)nonmarket factor
C)beta
D)unique part

Question 28

Based on recent history,an investor would probably have a lower risk level with a portfolio consisting of:

A)all stocks
B)all bonds
C)some stocks and some bonds
D)Impossible to tell

Question 29

A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk factors.

Question 30

The only asset class to provide systematic protection against inflation is:

A)bonds
B)real estate
C)foreign stocks
D)TIPS

Question 31

When using the Markowitz model,aggressive investors would select portfolios on the left end of the efficient frontier.

Question 32

To implement the single-index model,estimates of the _______for each stock are needed.

A)expected return
B)standard deviation
C)beta
D)covariance

Question 33

Which of the following statements is true regarding TIPS?

A)As inflation changes,the interest rate on the bond is adjusted
B)The correlation between TIPS and the S&P 500 Index has often been negative
C)TIPS are more volatile than regular Treasury bonds of similar maturity
D)TIPS always pay a premium over inflation

Question 34

Asset allocation is one of the most widely used applications of:

A)the Capital Asset Pricing Model.
B)random diversification.
C)passive portfolio approach.
D)modern portfolio theory.

Question 35

The Sharpe model was found to outperform the Markowitz model in longer time periods.

Question 36

Because of its complexity,the Markowitz model is no longer used by institutional investors.

Question 37

Under the Markowitz model,the risk of a portfolio is measured by the standard deviation of the portfolio return.

Question 38

Which of the following would not be considered a source of systematic risk?

A)a hostile takeover
B)a rise in inflation
C)a fall in GDP
D)a panic on Wall Street

Question 39

The single-index model implies stocks covary only because of their common:

A)currency
B)relationship to each other
C)relationship to the market
D)desire to make a profit

Question 40

Asset allocation accounts for less than 50 percent of the variance in quarterly returns for a typical pension fund.

Question 41

The Markowitz Model does not depend on the assumption of normally distributed security returns.

Question 42

It would be impossible to combine an asset allocation plan with Markowitz analysis.

Question 43

What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?

Question 44

Given the following information,calculate the expected return of Portfolio ABC.Expected return of stock A = 10%,Expected return of stock B = 15%,Expected return of stock C = 6%.40 percent of the portfolio is invested in A,40 percent is invested in B and 20 percent is invested in C.

Question 45

Based on recent research,it seems reasonable that approximately 10-20 securities are needed to ensure adequate diversification.

Question 46

Distinguish between systematic and nonsystematic risk.What are two other names for each? Give examples of each.

Question 47

Assume ABC are all positively correlated.A fourth stock is being considered for addition to the portfolio,either stock D or stock E.Both D and E have expected returns of 12%.If stock D is positively correlated with ABC and E is negatively correlated with ABC,which stock should be added to the portfolio? Why?

Question 48

Academic research shows asset allocation decisions explain approximately 90% of the variation in returns in a portfolio,whereas individual security analysis,including "stock picking," explains only about 10%.

Question 49

Explain what is efficient about the efficient frontier.

Question 50

Discuss the importance of the asset allocation decision for portfolio performance.

Question 51

Real estate has never been shown to be positively correlated with the performance of stocks.

Question 52

A well diversified portfolio will typically consist of a mix of small,mid and large cap stocks,both U.S.and foreign,as well as corporate and U.S.Treasury bonds,real estate and commodities.

Question 53

Suppose you interview two different portfolio managers about their efficient sets of portfolios.Is it possible,or even probable,that they would have two different efficient sets? Why?