Question 1

The beta coefficient is a measure of:

Accepted Answer

The beta coefficient measures the volatility or risk of an individual stock in relation to the overall market. Specifically, it represents the degree to which the return of a stock moves in response to changes in the stock market as a whole. Therefore, option A is the correct choice. Option B is incorrect because it refers to a stock's relationship with its portfolio, rather than the market. Option C is incorrect because it describes the relationship between portfolio risk and market risk, rather than the beta coefficient. Option D is incorrect because there is a correct answer choice.

Question 2

The investor wants to achieve the __________ risk-return indifference curve.

Accepted Answer

The investor would want to achieve the highest risk-return indifference curve, as this indicates they are receiving the greatest return for the level of risk they are willing to tolerate.

Question 3

If the _____ of any individual stock is known, an investor can use the _____ to determine the expected rate of return on that stock.

Accepted Answer

Beta measures the level of systematic risk of an individual stock in relation to the overall market. With the help of the security market line, an investor can determine the expected rate of return of a stock based on its risk level or beta. Therefore, option B is the correct choice.

Question 4

Under Markowitz's theory, the ideal portfolio for an investor is represented by:

Accepted Answer

According to Markowitz's theory, the ideal portfolio for an investor is the one that lies at the point of tangency between the efficient frontier (which represents the highest level of expected return for a given level of risk) and the investor's indifference curve (which represents the level of risk the investor is willing to take on for a given level of expected return). This point of tangency represents the optimal combination of risk and return for the investor. Therefore, option A is the correct answer. Options B and C are incorrect because they do not take into account the investor's willingness to bear risk. Option D is incorrect because one of the other options is correct.

Question 5

The point of tangency between the efficient frontier and the capital market line:

Accepted Answer

The point of tangency between the efficient frontier and the capital market line is the optimal portfolio of investments that offers the highest return for a given level of risk. It can be calculated using both the Markowitz portfolio theory and Capital Asset Pricing Model (CAPM) and represents the state of market equilibrium. Therefore, all of the given choices are correct.

Question 6

The correlation coefficient:

Accepted Answer

The correlation coefficient measures the joint movement between two variables.

Question 7

The efficient frontier:

Accepted Answer

The answer of The efficient frontier:
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Question 8

One way to express the trade-off between risk and return for an individual security is through:

Accepted Answer

The security market line (SML) shows the trade-off between risk and return for an individual security. It is a graphical representation of the capital asset pricing model (CAPM) which states that the expected return of a security is equal to the risk-free rate plus a risk premium that is proportional to the market risk premium and the security's beta coefficient. As the beta coefficient of a security increases, so does its expected return, but also its risk. Therefore, the SML helps investors evaluate whether a security is appropriately compensating them for the amount of risk they are taking on.

Question 9

Which of the following is NOT a problem associated with proving the validity of the security market line?

Accepted Answer

All three options (A, B, and C) are associated problems with proving the validity of the security market line.

Question 10

If you took all the possible investments that investors could acquire and determined the optimum basket of investments, you would come up with point _________ on the capital market line.

Accepted Answer

Point M represents the optimal portfolio that maximizes returns for a given level of risk, based on the combination of risky assets and risk-free assets on the efficient frontier.

Question 11

For two investments with a correlation coefficient (rij) less than +1, the portfolio standard deviation will be __________ the weighted average of the individual investments' standard deviation.

Accepted Answer

The portfolio standard deviation will be less than the weighted average of the individual investments' standard deviation because the correlation between the two investments reduces the overall risk of the portfolio. This is due to the fact that the returns of the two investments are not perfectly positively correlated, therefore reducing the impact of one investment's risk on the overall portfolio risk.

Question 12

The capital asset pricing model (CAPM) takes off where the _________ concluded.

Accepted Answer

The capital asset pricing model (CAPM) takes off where the efficient frontier and Markowitz portfolio theory concluded, through the introduction of a new investment outlet, the risk-free asset (R_F). A risk-free asset has no risk of default and a standard deviation of 0 and is the lowest assumed safe return that can be earned.

Question 13

If the market rate of return is 10% and the beta on a particular stock is .78, the return on the stock will be:

Accepted Answer

If the market rate of return is 10% and the beta on a particular stock is .78, the return on the stock will be less than 10%.

Question 14

A good way to minimize risk and receive an optimum return on your portfolio is:

Accepted Answer

A good way to minimize risk and receive an optimum return on your portfolio is through diversification.

Question 15

The capital market line (CML) as defined by the capital asset pricing model is characterized by all of the following except:

Accepted Answer

The capital market line (CML) represents a straight line that originates from the risk-free rate and is tangent to the efficient frontier, indicating the highest possible returns for a given level of risk. However, it does not represent a point on the efficient frontier above which higher returns can be generated by borrowing funds without assuming more risk. This description more accurately applies to the concept of leveraging beyond the tangent point, which is not a characteristic of the CML itself.

Question 16

The standard deviation of a risk-free asset is:

Accepted Answer

A risk-free asset has no risk of default and a standard deviation of 0 and is the lowest assumed safe return that can be earned.

Question 17

Countercyclical investments are more likely to have:

Accepted Answer

Countercyclical investments are more likely to have high negative correlation with a normal portfolio.

Question 18

Systematic risk is rewarded with a premium in the marketplace because:

Accepted Answer

Systematic risk is rewarded with a premium in the marketplace because it is associated with market movements which cannot be eliminated through diversification.

Question 19

The capital market line can be used to determine the expected return on any portfolio based on:

Accepted Answer

The capital market line (CML) represents portfolios that optimally combine risk and return, and it is used to determine the expected return based on the total risk (standard deviation) of the portfolio.

Question 20

Which of the following are assumptions of the capital asset pricing model?

Accepted Answer

The following are assumptions of the capital asset pricing model: funds can be borrowed or lent in unlimited quantities at risk-free rate; the objective of all investors is to maximize their expected utility over the same one-period time frame, using the same basis for evaluating investments; and there are no taxes or transaction costs associated with any investment.

Quiz 17: A Basic Look at Portfolio Management and Capital Market Theory