Question 1

A probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes.

Accepted Answer

A) True 
 B)False

Question 2

If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model, the assumption is that past relationships will continue in the future.

Accepted Answer

A) True 
 B)False

Question 3

Walter has his entire portfolio invested in the stock of the company where he works. He is considering purchasing one of four ETFs, each of which has the same expected return, but has a different correlation with his portfolio. Walter should choose the ETF that has a correlation of:

Accepted Answer

A)  -0.3. 
B)  0.0. 
C)  0.5. 
D)  1.0. 
A)  -0.3. 
B)  0.0. 
C)  0.5. 
D)  1.0.

Question 4

The average correlation of stocks in the S&P 500 with the Index itself is closest to:

Accepted Answer

A)  0.0. 
B)  0.3. 
C)  0.5. 
D)  0.8. 
A)  0.0. 
B)  0.3. 
C)  0.5. 
D)  0.8.

Question 5

Which of the following statements regarding expected return of a portfolio is true? It can:

Accepted Answer

A)  be higher than the weighted average expected return of the individual assets. 
B)  be lower than the weighted average return of the individual assets. 
C)  never differ from the weighted average expected return of the individual assets. 
D)  be higher than the expected return of the highest expected return individual asset. 
A)  be higher than the weighted average expected return of the individual assets. 
B)  be lower than the weighted average return of the individual assets. 
C)  never differ from the weighted average expected return of the individual assets. 
D)  be higher than the expected return of the highest expected return individual asset.

Question 6

Provide an example of two industries that might have low correlation with one another. Give an example that might exhibit high correlation.

Accepted Answer

Low correlation might be found between l

Question 7

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

Accepted Answer

If security returns are highly correlate

Question 8

An investor has her $1 million portfolio invested in two different mutual funds as follows: $400,000 in a small-cap fund and $600,000 in a balanced fund. The small-cap fund has an expected return of 12% and a variance of 625, whereas the balanced fund has an expected return of 7% and a variance of 81. The covariance between the two funds is 122.
A. Find the investor's expected portfolio return.
B.Find the standard deviation for the investor’s portfolio.
C.	Assuming the portfolio’s returns are normally distributed, find the range of returns that the investor is 95% confident her portfolio return will fall within.

Accepted Answer

A)First find the portfolio weights as fo

Question 9

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. 
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.

Question 10

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. 
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 11

In a portfolio consisting of two perfectly negatively correlated securities, the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.

Accepted Answer

A) True 
 B)False

Question 12

With a continuous probability distribution:

Accepted Answer

A)  a probability is assigned to each possible outcome. 
B)  possible outcomes are constantly changing. 
C)  an infinite number of possible outcomes exist. 
D)  there is no variance. 
A)  a probability is assigned to each possible outcome. 
B)  possible outcomes are constantly changing. 
C)  an infinite number of possible outcomes exist. 
D)  there is no variance.

Question 13

The correlation coefficient identifies what causes the relative movement in returns between two securities.

Accepted Answer

A) True 
 B)False

Question 14

An investor has calculated the covariance between a utility ETF and a bank ETF at 124. The variance of the utility ETF is 398 and the variance of the bank ETF is 548. Find the correlation between the two ETFs.

Accepted Answer

@#LAT-DLM& = 124 / (398<sup>1/

Question 15

The relevant risk for a well-diversified portfolio is:

Accepted Answer

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

Question 16

When constructing a portfolio, standard deviations, expected returns, and correlation coefficients are typically calculated from historical data. Why may that be a problem?

Accepted Answer

The problem is that historical patterns

Question 17

When the covariance is positive, the correlation will be:

Accepted Answer

A)  positive. 
B)  negative. 
C)  zero. 
D)  impossible to determine. 
A)  positive. 
B)  negative. 
C)  zero. 
D)  impossible to determine.

Question 18

When returns are perfectly positively correlated, the risk of the portfolio is:

Accepted Answer

A)  zero. 
B)  the weighted average of the individual security's risk. 
C)  equal to the correlation coefficient between the securities. 
D)  infinite. 
A)  zero. 
B)  the weighted average of the individual security's risk. 
C)  equal to the correlation coefficient between the securities. 
D)  infinite.

Question 19

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. 
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 20

The major difference between the correlation coefficient and the covariance is that the correlation coefficient:

Accepted Answer

A)  can be positive, negative, or zero, whereas the covariance is always positive. 
B)  measures the relationship between securities, whereas the covariance measures the relationship between a security and the market. 
C)  is a relative measure showing association between security returns, whereas the covariance is an absolute measure showing association between security returns. 
D)  is a geometric measure, and the covariance is an arithmetic measure. 
A)  can be positive, negative, or zero, whereas the covariance is always positive. 
B)  measures the relationship between securities, whereas the covariance measures the relationship between a security and the market. 
C)  is a relative measure showing association between security returns, whereas the covariance is an absolute measure showing association between security returns. 
D)  is a geometric measure, and the covariance is an arithmetic measure.

Exam 7: Portfolio Theory

A probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes.

If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model, the assumption is that past relationships will continue in the future.

Walter has his entire portfolio invested in the stock of the company where he works. He is considering purchasing one of four ETFs, each of which has the same expected return, but has a different correlation with his portfolio. Walter should choose the ETF that has a correlation of:

The average correlation of stocks in the S&P 500 with the Index itself is closest to:

Which of the following statements regarding expected return of a portfolio is true? It can:

Provide an example of two industries that might have low correlation with one another. Give an example that might exhibit high correlation.

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

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

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

In a portfolio consisting of two perfectly negatively correlated securities, the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.

With a continuous probability distribution:

The correlation coefficient identifies what causes the relative movement in returns between two securities.

An investor has calculated the covariance between a utility ETF and a bank ETF at 124. The variance of the utility ETF is 398 and the variance of the bank ETF is 548. Find the correlation between the two ETFs.

The relevant risk for a well-diversified portfolio is:

When constructing a portfolio, standard deviations, expected returns, and correlation coefficients are typically calculated from historical data. Why may that be a problem?

When the covariance is positive, the correlation will be:

When returns are perfectly positively correlated, the risk of the portfolio is:

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

The major difference between the correlation coefficient and the covariance is that the correlation coefficient:

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