Question 1

Portfolio risk is a weighted average of the individual security risks.

Accepted Answer

A) True 
 B)False

Question 2

A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.

Accepted Answer

A) True 
 B)False

Question 3

Conventional wisdom has long held that diversification of a stock portfolio should be across industries.Does the correlation coefficient indirectly recommend the same thing?

Accepted Answer

Correlation coefficients between securit...

Question 4

Why is it more difficult to put Markowitz diversification into effect than random diversification?

Accepted Answer

It requires more quantitative analysis and generally the use of a computer software program.In addition,it is more Answer:

Question 5

Which of the following would be considered a random variable?

Accepted Answer

A)  Expected value
B)  Correlation coefficient between two assets
C)  One-period rate of return for an asset
D)  Beta

Question 6

Which of the following portfolios has the least reduction of risk?

Accepted Answer

A)  A portfolio with securities all having positive correlation with each other.
B)  A portfolio with securities all having zero correlation with each other.
C)  A portfolio with securities all having negative correlation with each other.
D)  A portfolio with securities all having skewed correlation with each other.

Question 7

Security A and Security B have a correlation coefficient of 0.If Security A's return is expected to increase by 10 percent,Security B's:

Accepted Answer

A)  return should also increase by 10 percent.
B)  return should decrease by 10 percent.
C)  return should be zero.
D)  expected return is impossible to determine from the above information.

Question 8

Portfolio risk is most often measured by professional investors using the:

Accepted Answer

A)  expected value.
B)  portfolio's beta.
C)  weighted average of the individual asset's risk.
D)  portfolio's standard deviation.

Question 9

Two stocks with perfect negative correlation will have a correlation coefficient of:

Accepted Answer

A)  +1.0
B)  -2.0
C)  0.0
D)  -1.0

Question 10

How is the correlation coefficient important in choosing among securities for a portfolio?

Accepted Answer

If security returns are highly correlated (high positive correlation),diversification does little to reduce risk of returns.The lower the correlation coefficients among the securities,the more advantage is gained from diversification.

Question 11

The relevant risk for a well-diversified portfolio is:

Accepted Answer

A)  interest rate risk.
B)  inflation risk.
C)  business risk.
D)  market risk.

Question 12

According to the Law of Large Numbers,the larger the sample size,the more likely it is that the sample mean will be close to the population expected value.

Accepted Answer

A) True 
 B)False

Question 13

In order to determine the expected return of a portfolio,all of the following must be known except:

Accepted Answer

A)  the probabilities of expected returns of the individual assets.
B)  the weight of each individual asset in the portfolio.
C)  the expected return of each individual asset.
D)  the variance of return of each individual asset and correlation of returns between assets.

Question 14

Are the expected return and standard deviation of a portfolio both weighted averages of the individual security's expected returns and standard deviations?If not,what other factors are required?

Accepted Answer

The expected return is a weigh...

Question 15

Given the following probability distribution,calculate the expected return of security XYZ.
Security XYZ's
Potential returnProbability
20%0.3
30%0.2
-40%0.1
50%0.1
10%0.3

Accepted Answer

A)  16 percent
B)  22 percent
C)  25 percent
D)  18 percent

Question 16

Markowitz's main contribution to portfolio theory is that risk is:

Accepted Answer

A)  the same for each type of financial asset.
B)  a function of credit,liquidity,and market factors.
C)  not quantifiable.
D)  influenced more by covariance than variance when portfolios are large. D

Question 17

Portfolio risk can be reduced by reducing portfolio weights for assets with relatively high positive correlations.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements about the correlation coefficient of the returns for two securities is not true?

Accepted Answer

A)  It is a statistical measure.
B)  It measures the relationship between the two securities' returns.
C)  It determines the cause of the relationship between the two securities' returns.
D)  Its value falls between -1 and +1.

Question 19

Owning two securities instead of one will not improve a portfolio's risk-return tradeoff if the two securities are:

Accepted Answer

A)  perfectly positively correlated with each other.
B)  perfectly independent of each other.
C)  perfectly negatively correlated with each other.
D)  of the same category,e.g.blue chips.

Question 20

Which of the following is true regarding random diversification?

Accepted Answer

A)  Investment characteristics are considered important in random diversification.
B)  The net benefit of random diversification eventually disappears as more securities are added.
C)  Random diversification,if done correctly,can eliminate all risk in a portfolio.
D)  Random diversification eventually removes all company specific risk from a portfolio.

Exam 7: Portfolio Theory

Portfolio risk is a weighted average of the individual security risks.

Correct AnswerverifiedShow Answer

A negative correlation coefficient indicates that the returns of two securities have a tendency to move in opposite directions.

Correct AnswerverifiedShow Answer

Conventional wisdom has long held that diversification of a stock portfolio should be across industries.Does the correlation coefficient indirectly recommend the same thing?

Correct AnswerverifiedCorrelation coefficients between securit...View AnswerShow Answer

Why is it more difficult to put Markowitz diversification into effect than random diversification?

Correct AnswerverifiedIt requires more quantitative analysis and generally the use of a computer software program.In addition,it is more Answer:

Which of the following would be considered a random variable?

Correct AnswerverifiedShow Answer

Which of the following portfolios has the least reduction of risk?

Correct AnswerverifiedShow Answer

Security A and Security B have a correlation coefficient of 0.If Security A's return is expected to increase by 10 percent,Security B's:

Correct AnswerverifiedShow Answer

Portfolio risk is most often measured by professional investors using the:

Correct AnswerverifiedShow Answer

Two stocks with perfect negative correlation will have a correlation coefficient of:

Correct AnswerverifiedShow Answer

How is the correlation coefficient important in choosing among securities for a portfolio?

Correct AnswerverifiedIf security returns are highly correlated (high positive correlation),diversification does little to reduce risk of returns.The lower the correlation coefficients among the securities,the more advantage is gained from diversification.

The relevant risk for a well-diversified portfolio is:

Correct AnswerverifiedShow Answer

According to the Law of Large Numbers,the larger the sample size,the more likely it is that the sample mean will be close to the population expected value.

Correct AnswerverifiedShow Answer

In order to determine the expected return of a portfolio,all of the following must be known except:

Correct AnswerverifiedShow Answer

Are the expected return and standard deviation of a portfolio both weighted averages of the individual security's expected returns and standard deviations?If not,what other factors are required?

Correct AnswerverifiedThe expected return is a weigh...View AnswerShow Answer

Given the following probability distribution,calculate the expected return of security XYZ. Security XYZ's Potential returnProbability 20%0.3 30%0.2 -40%0.1 50%0.1 10%0.3

Correct AnswerverifiedShow Answer

Markowitz's main contribution to portfolio theory is that risk is:

Correct AnswerverifiedD

Portfolio risk can be reduced by reducing portfolio weights for assets with relatively high positive correlations.

Correct AnswerverifiedShow Answer

Which of the following statements about the correlation coefficient of the returns for two securities is not true?

Correct AnswerverifiedShow Answer

Owning two securities instead of one will not improve a portfolio's risk-return tradeoff if the two securities are:

Correct AnswerverifiedShow Answer

Which of the following is true regarding random diversification?

Correct AnswerverifiedShow Answer

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Correlation coefficients between securit...
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It requires more quantitative analysis and generally the use of a computer software program.In addition,it is more Answer:

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If security returns are highly correlated (high positive correlation),diversification does little to reduce risk of returns.The lower the correlation coefficients among the securities,the more advantage is gained from diversification.

Correct Answer
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The expected return is a weigh...
View Answer

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