Deck 5: Portfolio Management

Question 1

The slope of the utility curves for a strongly risk-averse investor, relative to the slope of the utility curves for a less risk-averse investor, will

A) be steeper.
B) be flatter.
C) be vertical.
D) be horizontal.
E) none of the above.

Answer 1

A

Question 2

A portfolio is considered to be efficient if

A) no other portfolio offers higher expected returns with the same risk.
B) no other portfolio offers lower risk with the same expected return.
C) there is no portfolio with a higher return.
D) choices a and b
E) all of the above

Answer 2

D

Question 3

You are given a two asset portfolio with a fixed correlation coefficient. If the weights of the two assets are varied the expected portfolio return would be ____ and the expected portfolio standard deviation would be ____.

A) nonlinear, elliptical
B) nonlinear, circular
C) linear, elliptical
D) linear, circular
E) circular, elliptical

Answer 3

C

Question 4

When assessing the risk impact of adding a new security to a portfolio, it is necessary to consider the

A) new security's variance
B) variance of every security in the portfolio
C) weight of every security in the portfolio
D) average covariance of the new security with every security in the portfolio
E) all of the above

Question 5

If equal risk is added moving along the envelope curve containing the best possible combinations the return will

A) decrease at an increasing rate.
B) decrease at a decreasing rate.
C) increase at an increasing rate.
D) increase at a decreasing rate.
E) remain constant.

Question 6

All of the following are assumptions of the Markowitz model except

A) risk is measured based on the variability of returns.
B) investors maximise one-period expected utility.
C) investors' utility curves demonstrate properties of diminishing marginal utility of wealth.
D) investors base decisions solely on expected return and time.
E) all of the above

Question 7

Which of the following statements about the correlation coefficient is false?

A) The values range between −1 to +1.
B) A value of +1 implies that the returns for the two stocks move together in a completely linear manner.
C) A value of −1 implies that the returns move in a completely opposite direction.
D) A value of zero means that the returns are independent.
E) None of the above (that is, all statements are true)

Question 8

A positive covariance between two variables indicates that

A) the two variables move in different directions.
B) the two variables move in the same direction.
C) the two variables are low risk.
D) the two variables are high risk.
E) the two variables are risk free.

Question 9

When individuals evaluate their portfolios they should evaluate

A) all domestic and foreign stocks.
B) all marketable securities.
C) all marketable securities and other liquid assets.
D) all assets.
E) all assets and liabilities.

Question 10

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

A) absolute
B) relative
C) indexed
D) loglinear
E) squared

Question 11

All of the following are common risk measurements except

A) standard deviation.
B) variance.
C) semivariance.
D) covariance.
E) range of returns.

Question 12

An individual investor's utility curves specify the tradeoffs he or she is willing to make between

A) high risk and low risk assets.
B) high return and low return assets.
C) covariance and correlation.
D) return and risk.
E) efficient portfolios.

Question 13

As the correlation coefficient between two assets decreases, the shape of the efficient frontier

A) approaches a horizontal straight line.
B) bends out.
C) bends in.
D) approaches a vertical straight line.
E) none of the above.

Question 14

Semivariance, when applied to portfolio theory, is concerned with

A) The square root of deviations from the mean.
B) All deviations below the mean.
C) All deviations above the mean.
D) All deviations.
E) The summation of the squared deviations from the mean.

Question 15

What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return

A) 18.45%
B) 12.82%
C) 13.38%
D) 15.27%
E) 16.67%