Question 1

The optimal combination of securities that provides the greatest amount of return for each level of risk is know as:

Accepted Answer

The efficient frontier represents the set of optimal portfolios that offer the highest expected return for a defined level of risk.

Question 2

One would see the greatest amount of diversification from two securities that are:

Accepted Answer

Negatively correlated securities offer the greatest amount of diversification because their prices move in opposite directions. When one security's price goes up, the other's tends to go down, reducing the overall risk of the portfolio.

Question 3

The variability on an asset's returns represents:

Accepted Answer

The variability of an asset's returns represents the level of risk associated with the investment. An investor wants to choose an asset with a lower level of variability, or risk, to avoid significant losses.

Question 4

Regarding real estate investments, risk that is associated with the type of property and its location, design, lease structure, and so on can be thought of as:

Accepted Answer

Business risk pertains to the possibility of losses due to factors such as market conditions, mismanagement, or an ineffective business plan. In the context of real estate investments, risks associated with the type of property and its location, design, and lease structure fall under business risk. Marketability risk refers to the ability to sell or lease the property at a reasonable price, while liquidity risk pertains to the ease of converting the investment into cash. Interest rate risk pertains to the potential impact of changes in interest rates on the investment's value.

Question 5

Assume a portfolio is comprised of two securities, A and B, whose standard deviations are 0.0412 and 0.0721, respectively. If their covariance is 0.002, what is their coefficient of correlation?

Accepted Answer

The formula for calculating the coefficient of correlation (rho) is rho = Cov(A,B) / (SD(A) * SD(B)). Plugging in the given values, we get rho = 0.002 / (0.0412 * 0.0721) = 0.6727. Rounded to the nearest thousandth, the coefficient of correlation is 0.673, which is answer choice C.

Question 6

The unit of measure that is used by portfolio managers to measure returns for individual securities on a periodic basis is the:

Accepted Answer

Holding period return (HPR) is the measure of return that portfolio managers use to measure returns for individual securities on a periodic basis. It is calculated as the difference between the ending price and the beginning price of a security, plus any income generated (such as dividends or interest), divided by the beginning price of the security. HPR is a useful measure because it takes into account the actual returns that an investor would receive over a specific time period, rather than just looking at the overall return of the investment.

Question 7

Which of the following provides a measure of the extent to which returns tend to move together or have no relationships?

Accepted Answer

Covariance measures the extent to which two variables, such as returns, move together.

Question 8

If the returns of two securities are compared over time and there appears to be no relationship between their movements, what is the likely value of their coefficient of correlation?

Accepted Answer

A coefficient of correlation of 0 indicates no linear relationship between the two securities' returns.

Question 9

The coefficient of variation of the returns, also known as the risk-to-reward ratio, is defined as:

Accepted Answer

The coefficient of variation is calculated as the standard deviation of returns divided by the mean return, providing a measure of relative risk compared to the expected return.

Quiz 22: Real Estate Investment Performance and Portfolio Considerations