Question 1

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 2

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. D

Question 3

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 4

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

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

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. 
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 8

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 9

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. 
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.

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

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 12

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 13

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 14

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

Question 15

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

Question 16

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 17

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 18

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. 
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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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. 
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.

Exam 7: Portfolio Theory

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

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

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

Which of the following would be considered a random variable?

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

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

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

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

Which of the following is true regarding random diversification?

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

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

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

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.

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

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

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?

The relevant risk for a well-diversified portfolio is:

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:

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

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

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