Question 1

Historical betas are always reliable predictors of future return fluctuations.

Accepted Answer

A) True 
 B)False

Question 2

Portfolio objectives should be established independently of tax considerations.

Accepted Answer

A) True 
 B)False

Question 3

Explain the relationship between correlation, diversification, and risk reduction.

Accepted Answer

Correlation is a statistic that measures the relationship between returns on assets. Positively correlated assets move together; negatively correlated opposites move in opposite directions. Diversification reduces risk most effectively when the assets have low or negative coefficients of correlation.

Question 4

In designing a portfolio, the only relevant risk is

Accepted Answer

A)   unsystematic risk.
B)   total risk.
C)   non- diversifiable risk.
D)   event risk.

Question 5

A beta of 0.5 means that a share is half as risky as the overall market.

Accepted Answer

A) True 
 B)False

Question 6

Traditional portfolio management

Accepted Answer

A)   includes only diversified bonds in a laddered portfolio.
B)   typically centres on interindustry diversification.
C)   is based on statistical measures to develop the portfolio plan.
D)   concentrates on only the most recent "hot" sectors of the market.

Question 7

To obtain the maximum reduction in risk, an investor should combine assets that

Accepted Answer

A)   are negatively correlated.
B)   have a correlation coefficient of negative one.
C)   are uncorrelated.
D)   have a correlation coefficient of positive one.

Question 8

When the Capital Asset Pricing Model is depicted graphically, the result is the

Accepted Answer

A)   alpha- beta line.
B)   coefficient of variation line.
C)   security market line.
D)   standard deviation line. C

Question 9

Studies have shown that investing in different industries as well as different countries reduces portfolio risk.

Accepted Answer

A) True 
 B)False  True

Question 10

The best share to own when the share market is at a peak and is expected to decline in value is one with a beta of

Accepted Answer

A)   - 1.0.
B)   - 0.5.
C)   +1.5.
D)   +1.0.

Question 11

The beta of the market is

Accepted Answer

A)   1.0.
B)   - 1.0.
C)   0.0.
D)   undefined.

Question 12

A share with a beta of 1.3 is less risky than a share with a beta of 0.42.

Accepted Answer

A) True 
 B)False

Question 13

Betas must be positive numbers.

Accepted Answer

A) True 
 B)False

Question 14

Portfolios falling to the left of the efficient frontier

Accepted Answer

A)   would be desirable if only they were possible.
B)   do not use all of the assets in the portfolio.
C)   fall within the set of feasible portfolios.
D)   have too much risk for the expected return.

Question 15

The opportunities to earn excess returns in foreign investments continue to grow.

Accepted Answer

A) True 
 B)False

Question 16

What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk- free rate of 4%?

Accepted Answer

A)   8.72%.
B)   12.72%.
C)   8.36%.
D)   4.36%.

Question 17

The Franko Company has a beta of 1.09. By what percent will the rate of return on the stock of Franko Company increase if the market rate of return rises by 3%?

Accepted Answer

A)   4.09%.
B)   1.91%.
C)   2.75%.
D)   3.27%.

Question 18

Diversifiable risk is also called systematic risk.

Accepted Answer

A) True 
 B)False

Question 19

Combining uncorrelated assets should

Accepted Answer

A)   not change the overall risk level of a portfolio.
B)   increase the overall risk level of a portfolio.
C)   decrease the overall risk level of a portfolio.
D)   cause the other assets in the portfolio to become positively related.

Question 20

The optimal portfolio for an individual investor is represented by the point that lies on the

Accepted Answer

A)   utility curve which is just tangent to the efficient frontier.
B)   lowest possible utility curve and connects to the efficient frontier.
C)   utility curve which represents the highest possible rate of return within the feasible set of risk- return options.
D)   utility curve which is just tangent to the right side of the feasible set of risk- return options.

Exam 5: Modern Portfolio Concepts

Historical betas are always reliable predictors of future return fluctuations.

Correct Answer
verified

Portfolio objectives should be established independently of tax considerations.

Correct Answer
verified

Explain the relationship between correlation, diversification, and risk reduction.

In designing a portfolio, the only relevant risk is

Correct Answer
verified

A beta of 0.5 means that a share is half as risky as the overall market.

Correct Answer
verified

Traditional portfolio management

Correct Answer
verified

To obtain the maximum reduction in risk, an investor should combine assets that

Correct Answer
verified

When the Capital Asset Pricing Model is depicted graphically, the result is the

Correct Answer
verified
C

Studies have shown that investing in different industries as well as different countries reduces portfolio risk.

Correct Answer
verified
True

The best share to own when the share market is at a peak and is expected to decline in value is one with a beta of

Correct Answer
verified

The beta of the market is

Correct Answer
verified

A share with a beta of 1.3 is less risky than a share with a beta of 0.42.

Correct Answer
verified

Betas must be positive numbers.

Correct Answer
verified

Portfolios falling to the left of the efficient frontier

Correct Answer
verified

The opportunities to earn excess returns in foreign investments continue to grow.

Correct Answer
verified

What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk- free rate of 4%?

Correct Answer
verified

The Franko Company has a beta of 1.09. By what percent will the rate of return on the stock of Franko Company increase if the market rate of return rises by 3%?

Correct Answer
verified

Diversifiable risk is also called systematic risk.

Correct Answer
verified

Combining uncorrelated assets should

Correct Answer
verified

The optimal portfolio for an individual investor is represented by the point that lies on the

Correct Answer
verified

Exam 5: Modern Portfolio Concepts

Historical betas are always reliable predictors of future return fluctuations.

Correct AnswerverifiedShow Answer

Portfolio objectives should be established independently of tax considerations.

Correct AnswerverifiedShow Answer

Explain the relationship between correlation, diversification, and risk reduction.

In designing a portfolio, the only relevant risk is

Correct AnswerverifiedShow Answer

A beta of 0.5 means that a share is half as risky as the overall market.

Correct AnswerverifiedShow Answer

Traditional portfolio management

Correct AnswerverifiedShow Answer

To obtain the maximum reduction in risk, an investor should combine assets that

Correct AnswerverifiedShow Answer

When the Capital Asset Pricing Model is depicted graphically, the result is the

Correct AnswerverifiedC

Studies have shown that investing in different industries as well as different countries reduces portfolio risk.

Correct AnswerverifiedTrue

The best share to own when the share market is at a peak and is expected to decline in value is one with a beta of

Correct AnswerverifiedShow Answer

The beta of the market is

Correct AnswerverifiedShow Answer

A share with a beta of 1.3 is less risky than a share with a beta of 0.42.

Correct AnswerverifiedShow Answer

Betas must be positive numbers.

Correct AnswerverifiedShow Answer

Portfolios falling to the left of the efficient frontier

Correct AnswerverifiedShow Answer

The opportunities to earn excess returns in foreign investments continue to grow.

Correct AnswerverifiedShow Answer

What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk- free rate of 4%?

Correct AnswerverifiedShow Answer

The Franko Company has a beta of 1.09. By what percent will the rate of return on the stock of Franko Company increase if the market rate of return rises by 3%?

Correct AnswerverifiedShow Answer

Diversifiable risk is also called systematic risk.

Correct AnswerverifiedShow Answer

Combining uncorrelated assets should

Correct AnswerverifiedShow Answer

The optimal portfolio for an individual investor is represented by the point that lies on the

Correct AnswerverifiedShow Answer

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C

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True

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