Question 1

Company specific risk is also known as:

Accepted Answer

A) market risk. 
B) systematic risk. 
C) non-diversifiable risk. 
D) diversifiable risk. 
A) market risk. 
B) systematic risk. 
C) non-diversifiable risk. 
D) diversifiable risk.

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

Which of the following involves the interrelationship between security returns as well as the expected returns and variances of those returns?

Accepted Answer

A) Random diversification 
B) Correlating diversification 
C) Friedman diversification 
D) Markowitz diversification 
A) Random diversification 
B) Correlating diversification 
C) Friedman diversification 
D) Markowitz diversification

Question 5

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 6

In the case of a four-security portfolio,there will be 8 covariances.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements regarding portfolio risk and number ofstocks is generally true?

Accepted Answer

A) Adding more stocks increases risk. 
B) Adding more stocks decreases risk,but does not eliminate it. 
C) Adding more stocks has no effect on risk. 
D) Adding more stocks decreases only systematic risk. 
A) Adding more stocks increases risk. 
B) Adding more stocks decreases risk,but does not eliminate it. 
C) Adding more stocks has no effect on risk. 
D) Adding more stocks decreases only systematic risk.

Question 8

Standard deviations for well-diversified portfolios are reasonably steady over time.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is true regarding the expected return of a portfolio?

Accepted Answer

A) It is a weighted average only for stock portfolios. 
B) It can only be positive. 
C) It can never be above the highest individual asset return. 
D) It is always below the highest individual asset return. 
A) It is a weighted average only for stock portfolios. 
B) It can only be positive. 
C) It can never be above the highest individual asset return. 
D) It is always below the highest individual asset return.

Question 10

Why was the Markowitz model impractical for commercial use when it was first introduced in 1952?What has changed by the 1990s?

Accepted Answer

The volume of calculations req

Question 11

A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in:

Accepted Answer

A) both the expected return and the risk of the portfolio. 
B) only the expected return of the portfolio. 
C) only the risk level of the portfolio. 
D) neither the expected return nor the risk level of the portfolio. 
A) both the expected return and the risk of the portfolio. 
B) only the expected return of the portfolio. 
C) only the risk level of the portfolio. 
D) neither the expected return nor the risk level of the portfolio.

Question 12

The number of covariances in the Markowitz model is ________ ;the number of unique covariances is [n (n-1)]/2.

Accepted Answer

The answer of The number of covariances in the Markowitz...

Question 13

Calculate the risk (standard deviation)of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5.
$\begin{array}{cc}
&\text { Variance } & \text { Weight (in the portfolio) } \
\hline  \text {  Security A } &10 & 0.3 \
 \text { Security B } &20 & 0.7
\end{array}$

Accepted Answer

A) 17.0 percent 
B) 5.4 percent 
C) 2.0 percent 
D) 3.7 percent
$\begin{aligned}
\sigma_{\mathrm{p}} & =\left[\mathrm{wl}^{2} \sigma_{1}^{2}+\mathrm{w}_{2}^{2} \sigma_{2}^{2}+2\left(\mathrm{w}_{1}\right)\left(\mathrm{w}_{2}\right)\left(\rho_{1,2}\right) \sigma_{1} \sigma_{2}\right]^{1 / 2} \
& =\left[(0.3)^{2}(10)+(0.7)^{2}(20)+\right. \
& \left.=2(0.3)(0.7)(0.5)(10)^{1 / 2}(20)^{1 / 2}\right]^{1 / 2}=3.7 \%
\end{aligned}$ 
A) 17.0 percent 
B) 5.4 percent 
C) 2.0 percent 
D) 3.7 percent
$\begin{aligned}
\sigma_{\mathrm{p}} & =\left[\mathrm{wl}^{2} \sigma_{1}^{2}+\mathrm{w}_{2}^{2} \sigma_{2}^{2}+2\left(\mathrm{w}_{1}\right)\left(\mathrm{w}_{2}\right)\left(\rho_{1,2}\right) \sigma_{1} \sigma_{2}\right]^{1 / 2} \
& =\left[(0.3)^{2}(10)+(0.7)^{2}(20)+\right. \
& \left.=2(0.3)(0.7)(0.5)(10)^{1 / 2}(20)^{1 / 2}\right]^{1 / 2}=3.7 \%
\end{aligned}$

Question 14

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 15

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 16

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 17

Throwing a dart at the WSJ and selecting stocks on this basis would be considered random diversification.

Accepted Answer

A) True 
 B)False

Question 18

The major problem with the Markowitz model is its:

Accepted Answer

A) lack of accuracy. 
B) predictability flaws. 
C) complexity. 
D) inability to handle large number of inputs. 
A) lack of accuracy. 
B) predictability flaws. 
C) complexity. 
D) inability to handle large number of inputs.

Question 19

The expected value is the:

Accepted Answer

A) inverse of the standard deviation. 
B) correlation between a security's risk and return. 
C) weighted average of all possible outcomes. 
D) same as the discrete probability distribution. 
A) inverse of the standard deviation. 
B) correlation between a security's risk and return. 
C) weighted average of all possible outcomes. 
D) same as the discrete probability distribution.

Question 20

With a discrete 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.

Exam 7: Portfolio Theory

Company specific risk is also known as:

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

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

Which of the following involves the interrelationship between security returns as well as the expected returns and variances of those returns?

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.

In the case of a four-security portfolio,there will be 8 covariances.

Which of the following statements regarding portfolio risk and number ofstocks is generally true?

Standard deviations for well-diversified portfolios are reasonably steady over time.

Which of the following is true regarding the expected return of a portfolio?

Why was the Markowitz model impractical for commercial use when it was first introduced in 1952?What has changed by the 1990s?

A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in:

The number of covariances in the Markowitz model is ________ ;the number of unique covariances is [n (n-1)]/2.

Calculate the risk (standard deviation)of the following two-security portfolio if the correlation coefficient between the two securities is equal to 0.5. Variance Weight (in the portfolio) Security A 10 0.3 Security B 20 0.7

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

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

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

Throwing a dart at the WSJ and selecting stocks on this basis would be considered random diversification.

The major problem with the Markowitz model is its:

The expected value is the:

With a discrete probability distribution:

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