Question 1

Under Markowitz's theory, the ideal portfolio for an investor is represented by:

Accepted Answer

A) the point of tangency between the efficient frontier and the investor's indifference curve. 
B) the highest possible indifference curve. 
C) the highest possible point on the efficient frontier. 
D) None of the above 
A) the point of tangency between the efficient frontier and the investor's indifference curve. 
B) the highest possible indifference curve. 
C) the highest possible point on the efficient frontier. 
D) None of the above

Question 2

Points along the capital market line represent a combination of a risk-free asset and M (the market portfolio) with the possibility of borrowing beyond point M.

Accepted Answer

A) True 
 B)False

Question 3

In general, the greater the dispersion of outcomes, the lower the risk.

Accepted Answer

A) True 
 B)False

Question 4

Systematic risk measures risk that is related to the market.

Accepted Answer

A) True 
 B)False

Question 5

Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The standard deviation for the portfolio is:

Accepted Answer

A) 5.717%. 
B) 3.510%. 
C) 1.873%. 
D) 6.480%. 
E) 3.842%. 
A) 5.717%. 
B) 3.510%. 
C) 1.873%. 
D) 6.480%. 
E) 3.842%.

Question 6

A good way to minimize risk and receive an optimum return on your portfolio is:

Accepted Answer

A) through diversification. 
B) to buy only risk-free securities. 
C) through blue-chip stock purchases only. 
D) through junk-bonds. 
A) through diversification. 
B) to buy only risk-free securities. 
C) through blue-chip stock purchases only. 
D) through junk-bonds.

Question 7

The investor is only assumed to receive additional returns for unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 8

The point of tangency between the efficient frontier and the capital market line:

Accepted Answer

A) is the ideal portfolio of available investments. 
B) can be calculated by using the Markowitz portfolio theory and CAPM. 
C) represents the point at which the market is in equilibrium. 
D) All of the above 
A) is the ideal portfolio of available investments. 
B) can be calculated by using the Markowitz portfolio theory and CAPM. 
C) represents the point at which the market is in equilibrium. 
D) All of the above

Question 9

The standard deviation of a risk-free asset is:

Accepted Answer

A) 1. 
B) 0. 
C) -1. 
D) any number between -1 and 1. 
A) 1. 
B) 0. 
C) -1. 
D) any number between -1 and 1.

Question 10

In using the capital market line, the higher the portfolio standard deviation, the lower the anticipated return (Kp).

Accepted Answer

A) True 
 B)False

Question 11

The capital market line enables investors to achieve a higher level of utility than they could on the efficient frontier.

Accepted Answer

A) True 
 B)False

Question 12

The beta coefficient indicates how volatile a stock is, relative to the market.

Accepted Answer

A) True 
 B)False

Question 13

The capital market line can be used to determine the expected return on any portfolio based on:

Accepted Answer

A) unsystematic risk. 
B) the degree of risk on that portfolio. 
C) the market rate of return. 
D) None of the above 
A) unsystematic risk. 
B) the degree of risk on that portfolio. 
C) the market rate of return. 
D) None of the above

Question 14

An underlying assumption to the CAPM model is that an individual can choose an investment combining the return on the risk-free asset with the market rate of return, and this will provide superior returns to the efficient frontier at all points except M, where they are equal.

Accepted Answer

A) True 
 B)False

Question 15

The expected value for a portfolio is a weighted average of the individual securities' expected values.

Accepted Answer

A) True 
 B)False

Question 16

The greater the negative correlation between two (or more) securities, the lower the portfolio standard deviation (all else being equal).

Accepted Answer

A) True 
 B)False

Question 17

The investor wants to achieve the __________ risk-return indifference curve.

Accepted Answer

A) lowest 
B) highest 
C) median 
D) mean 
A) lowest 
B) highest 
C) median 
D) mean

Question 18

An assumption of the capital asset pricing model is that investors can borrow or lend an unlimited amount of funds at a given risk-free rate.

Accepted Answer

A) True 
 B)False

Question 19

The efficient frontier:

Accepted Answer

A) represents all possible portfolios for a given level of risk. 
B) separates unattainable portfolios from less than optimal portfolios. 
C) is different for every investor. 
D) More than one of the above 
A) represents all possible portfolios for a given level of risk. 
B) separates unattainable portfolios from less than optimal portfolios. 
C) is different for every investor. 
D) More than one of the above

Question 20

According to the text, a risk-averse investor:

Accepted Answer

A) demands a premium for assuming risk. 
B) will only participate in low-risk or risk-free investments. 
C) is one of a small minority in the United States. 
D) More than one of the above 
A) demands a premium for assuming risk. 
B) will only participate in low-risk or risk-free investments. 
C) is one of a small minority in the United States. 
D) More than one of the above

Exam 17: A Basic Look at Portfolio Management and Capital Market Theory

Under Markowitz's theory, the ideal portfolio for an investor is represented by:

Points along the capital market line represent a combination of a risk-free asset and M (the market portfolio) with the possibility of borrowing beyond point M.

In general, the greater the dispersion of outcomes, the lower the risk.

Systematic risk measures risk that is related to the market.

Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The standard deviation for the portfolio is:

A good way to minimize risk and receive an optimum return on your portfolio is:

The investor is only assumed to receive additional returns for unsystematic risk.

The point of tangency between the efficient frontier and the capital market line:

The standard deviation of a risk-free asset is:

In using the capital market line, the higher the portfolio standard deviation, the lower the anticipated return (Kp).

The capital market line enables investors to achieve a higher level of utility than they could on the efficient frontier.

The beta coefficient indicates how volatile a stock is, relative to the market.

The capital market line can be used to determine the expected return on any portfolio based on:

An underlying assumption to the CAPM model is that an individual can choose an investment combining the return on the risk-free asset with the market rate of return, and this will provide superior returns to the efficient frontier at all points except M, where they are equal.

The expected value for a portfolio is a weighted average of the individual securities' expected values.

The greater the negative correlation between two (or more) securities, the lower the portfolio standard deviation (all else being equal).

The investor wants to achieve the __________ risk-return indifference curve.

An assumption of the capital asset pricing model is that investors can borrow or lend an unlimited amount of funds at a given risk-free rate.

The efficient frontier:

According to the text, a risk-averse investor:

The Investment Setting

Security Markets

Participating in the Market

Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Valuation of the Individual Firm

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Convertible Securities and Warrants

Put and Call Options

Commodities and Financial Futures

Stock Index Futures and Options

Duration and Bond Portfolio Management

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

Filters

In using the capital market line, the higher the portfolio standard deviation, the lower the anticipated return (K_p).