Question 1

Explain what is efficient about the efficient frontier.

Accepted Answer

Any portfolio on the efficient

Question 2

Discuss the importance of the asset allocation decision for portfolio performance.

Accepted Answer

Deciding what percentage of portfolio fu

Question 3

Based on the historic evidence,which of the following is the most supported reason for adding gold to a portfolio of U.S.stocks?

Accepted Answer

A) To increase the portfolio's expected return. 
B) To reduce the portfolio's risk. 
C) To increase the portfolio's expected return and reduce its risk. 
D) To increase the portfolio's expected return and maintain its risk. 
A) To increase the portfolio's expected return. 
B) To reduce the portfolio's risk. 
C) To increase the portfolio's expected return and reduce its risk. 
D) To increase the portfolio's expected return and maintain its risk.

Question 4

When using the Markowitz model,aggressive investors would select portfolios on the left end of the efficient frontier.

Accepted Answer

A) True 
 B)False

Question 5

Because of its complexity,the Markowitz model is no longer used by institutional investors.

Accepted Answer

A) True 
 B)False

Question 6

Systematic risk is also called:

Accepted Answer

A) diversifiable risk. 
B) market risk. 
C) random risk. 
D) company-specific risk. 
A) diversifiable risk. 
B) market risk. 
C) random risk. 
D) company-specific risk.

Question 7

The only asset class to provide systematic protection against inflation is:

Accepted Answer

A) bonds. 
B) real estate. 
C) foreign stocks. 
D) TIPS. 
A) bonds. 
B) real estate. 
C) foreign stocks. 
D) TIPS.

Question 8

Which of the following portfolios cannot be on the efficient frontier?

Accepted Answer

A) A: expected return of 10 percent;standard deviation of 8 percent 
B) B: expected return of 18 percent;standard deviation of 13 percent 
C) C: expected return of 38 percent;standard deviation of 38 percent 
D) D: expected return of 15 percent;standard deviation of 14 percent 
A) A: expected return of 10 percent;standard deviation of 8 percent 
B) B: expected return of 18 percent;standard deviation of 13 percent 
C) C: expected return of 38 percent;standard deviation of 38 percent 
D) D: expected return of 15 percent;standard deviation of 14 percent

Question 9

According to the Markowitz model,rational investors will seek efficient portfolios because these portfolios are optimal based on:

Accepted Answer

A) expected return. 
B) risk. 
C) expected return and risk. 
D) transactions costs. 
A) expected return. 
B) risk. 
C) expected return and risk. 
D) transactions costs.

Question 10

A portfolio which lies below the efficient frontier is described as:

Accepted Answer

A) optimal. 
B) unattainable. 
C) dominant. 
D) dominated. 
A) optimal. 
B) unattainable. 
C) dominant. 
D) dominated.

Question 11

As a measure of market risk,the beta for the S&P 500 is generally considered to be:

Accepted Answer

A) -1.0. 
B) 1.0. 
C) 0. 
D) impossible to determine. 
A) -1.0. 
B) 1.0. 
C) 0. 
D) impossible to determine.

Question 12

Gordon holds a portfolio of U.S.equities and is considering adding several alternative ETFs that are tied to different asset classes.Adding which of the following ETFs would produce the largest reduction in the risk of Gordon's portfolio?

Accepted Answer

A) A real estate ETF 
B) An emerging markets ETF 
C) An EAFE ETF 
D) A U.S.bond ETF 
A) A real estate ETF 
B) An emerging markets ETF 
C) An EAFE ETF 
D) A U.S.bond ETF

Question 13

Suppose you interview two different portfolio managers about their efficient sets of portfolios.Is it possible,or even probable,that they would have two different efficient sets?Why?

Accepted Answer

Yes.Two different managers are

Question 14

An index commonly used as a proxy for developed market international equities is the:

Accepted Answer

A) MSCI EAFE Index. 
B) MSCI Emerging Markets Index. 
C) Russell 1000 Index. 
D) FTSE NAREIT Index. 
A) MSCI EAFE Index. 
B) MSCI Emerging Markets Index. 
C) Russell 1000 Index. 
D) FTSE NAREIT Index.

Question 15

What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?

Accepted Answer

Security weights.Other variabl

Question 16

The optimal portfolio for a risk-averse investor:

Accepted Answer

A) cannot be determined. 
B) occurs at the point of tangency between the highest indifference curve and the highest expected return. 
C) occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios. 
D) occurs at the point of tangency between the highest expected return and lowest-risk efficient portfolio. 
A) cannot be determined. 
B) occurs at the point of tangency between the highest indifference curve and the highest expected return. 
C) occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios. 
D) occurs at the point of tangency between the highest expected return and lowest-risk efficient portfolio.

Question 17

Based on recent history,an investor would have a lower risk level with a portfolio consisting of:

Accepted Answer

A) all stocks. 
B) all bonds. 
C) some stocks and some bonds. 
D) Impossible to tell. 
A) all stocks. 
B) all bonds. 
C) some stocks and some bonds. 
D) Impossible to tell.

Question 18

Which of the following statements is true regarding TIPS?

Accepted Answer

A) As inflation changes,the interest rate on the bond is adjusted. 
B) The correlation between TIPS and the S&P 500 Index has often been negative. 
C) TIPS are more volatile than regular Treasury bonds of similar maturity. 
D) The return on TIPS is often lower than the inflation rate. 
A) As inflation changes,the interest rate on the bond is adjusted. 
B) The correlation between TIPS and the S&P 500 Index has often been negative. 
C) TIPS are more volatile than regular Treasury bonds of similar maturity. 
D) The return on TIPS is often lower than the inflation rate.

Question 19

Which of the following statements about diversification is most accurate?The purpose of diversification is to:

Accepted Answer

A) increase a portfolio's expected return. 
B) reduce a portfolio's non-diversifiable risk. 
C) reduce a portfolio's systematic risk. 
D) reduce a portfolio's total risk. 
A) increase a portfolio's expected return. 
B) reduce a portfolio's non-diversifiable risk. 
C) reduce a portfolio's systematic risk. 
D) reduce a portfolio's total risk.

Question 20

According to the Markowitz model,an efficient portfolio is one that has the:

Accepted Answer

A) largest expected return for the smallest level of risk. 
B) largest expected return and zero risk. 
C) largest expected return for a given level of risk. 
D) smallest level of risk. 
A) largest expected return for the smallest level of risk. 
B) largest expected return and zero risk. 
C) largest expected return for a given level of risk. 
D) smallest level of risk.

Exam 8: Portfolio Selection

Explain what is efficient about the efficient frontier.

Discuss the importance of the asset allocation decision for portfolio performance.

Based on the historic evidence,which of the following is the most supported reason for adding gold to a portfolio of U.S.stocks?

When using the Markowitz model,aggressive investors would select portfolios on the left end of the efficient frontier.

Because of its complexity,the Markowitz model is no longer used by institutional investors.

Systematic risk is also called:

The only asset class to provide systematic protection against inflation is:

Which of the following portfolios cannot be on the efficient frontier?

According to the Markowitz model,rational investors will seek efficient portfolios because these portfolios are optimal based on:

A portfolio which lies below the efficient frontier is described as:

As a measure of market risk,the beta for the S&P 500 is generally considered to be:

Gordon holds a portfolio of U.S.equities and is considering adding several alternative ETFs that are tied to different asset classes.Adding which of the following ETFs would produce the largest reduction in the risk of Gordon's portfolio?

Suppose you interview two different portfolio managers about their efficient sets of portfolios.Is it possible,or even probable,that they would have two different efficient sets?Why?

An index commonly used as a proxy for developed market international equities is the:

What variable is manipulated to determine efficient portfolios,and why are the other variables not changed at will?

The optimal portfolio for a risk-averse investor:

Based on recent history,an investor would have a lower risk level with a portfolio consisting of:

Which of the following statements is true regarding TIPS?

Which of the following statements about diversification is most accurate?The purpose of diversification is to:

According to the Markowitz model,an efficient portfolio is one that has the:

Understanding Investments

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Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risks and Returns From Investing

Portfolio Theory

Asset Pricing Models

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economy Market Analysis

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Bond Yields

Bonds: Analysis and Strategy

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