Question 1

The Markowitz model assumes that investors are "risk averse", which means that they:

Accepted Answer

A)  will not take a "fair gamble." 
B)  will take a "fair gamble." 
C)  will take a "fair gamble" fifty percent of the time. 
D)  will never assume investment risk. 
A)  will not take a "fair gamble." 
B)  will take a "fair gamble." 
C)  will take a "fair gamble" fifty percent of the time. 
D)  will never assume investment risk. A

Question 2

Which of the following is not an assumption of Markowitz portfolio theory?

Accepted Answer

A)  A single investment period 
B)  Investor preferences are based only on expected return and risk 
C)  Low transactions costs 
D)  The availability of a risk-free asset 
A)  A single investment period 
B)  Investor preferences are based only on expected return and risk 
C)  Low transactions costs 
D)  The availability of a risk-free asset D

Question 3

A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk.

Accepted Answer

A) True 
 B)False  True

Question 4

Research shows asset allocation decisions explain approximately 90% of the variation in portfolio returns, whereas individual security selection explains only about 10%.

Accepted Answer

A) True 
 B)False

Question 5

Karl invested his entire portfolio in a randomly-selected, single stock. Which of the following best approximates the standard deviation that Walter should expect for his portfolio?

Accepted Answer

A)  10% 
B)  16% 
C)  20% 
D)  35% 
A)  10% 
B)  16% 
C)  20% 
D)  35%

Question 6

Asset allocation explains less than 50 percent of the variance in quarterly returns for a typical pension fund.

Accepted Answer

A) True 
 B)False

Question 7

The optimal portfolio is the efficient portfolio with the:

Accepted Answer

A)  lowest risk. 
B)  highest risk. 
C)  highest utility. 
D)  least investment. 
A)  lowest risk. 
B)  highest risk. 
C)  highest utility. 
D)  least investment.

Question 8

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.

Question 9

Investors that are highly risk averse have steeper indifference curves.

Accepted Answer

A) True 
 B)False

Question 10

Under the Markowitz model, the risk of a portfolio is measured by the standard deviation of the portfolio returns.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Markowitz derived the efficient frontier as an upward-sloping straight line.

Accepted Answer

A) True 
 B)False

Question 13

Based on 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 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

Which of the following would not be considered a source of systematic risk?

Accepted Answer

A)  A hostile takeover 
B)  An increase in inflation 
C)  A decrease in GDP 
D)  A panic on Wall Street 
A)  A hostile takeover 
B)  An increase in inflation 
C)  A decrease in GDP 
D)  A panic on Wall Street

Question 16

Which of the following funds would provide the most diversification benefit if added to a portfolio of 50 stocks that was spread across industries? A fund that tracks the:

Accepted Answer

A)  emerging markets. 
B)  NAREIT index. 
C)  S&P GSCI. 
D)  S&P 500. 
A)  emerging markets. 
B)  NAREIT index. 
C)  S&P GSCI. 
D)  S&P 500.

Question 17

An investor holds a portfolio invested entirely in stock LMN, which has a standard deviation of 20%. Assume the investor sells 50% of his LMN holdings and invests the sale proceeds in stock XYZ, which has a 10% standard deviation and a correlation of 1.0 with stock LMN.
A. Has the investor reduced the risk of his portfolio? Explain why or why not.
B. If stock XYZ had a correlation of 0 with stock LMN, would the investor reduce portfolio risk? Explain why or why not.

Accepted Answer

A)Yes, the standard deviation of the new

Question 18

Distinguish between systematic and unsystematic risk. What are two other names for each? Give examples of each.

Accepted Answer

Systematic risk is also called market ri

Question 19

The returns from precious metals funds are quite similar across fund type.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

Security weights. Other variab

Exam 8: Portfolio Selection and Asset Allocation

The Markowitz model assumes that investors are "risk averse", which means that they:

Which of the following is not an assumption of Markowitz portfolio theory?

A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk.

Research shows asset allocation decisions explain approximately 90% of the variation in portfolio returns, whereas individual security selection explains only about 10%.

Karl invested his entire portfolio in a randomly-selected, single stock. Which of the following best approximates the standard deviation that Walter should expect for his portfolio?

Asset allocation explains less than 50 percent of the variance in quarterly returns for a typical pension fund.

The optimal portfolio is the efficient portfolio with the:

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

Investors that are highly risk averse have steeper indifference curves.

Under the Markowitz model, the risk of a portfolio is measured by the standard deviation of the portfolio returns.

The purpose of diversification is to:

Markowitz derived the efficient frontier as an upward-sloping straight line.

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

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

Which of the following would not be considered a source of systematic risk?

Which of the following funds would provide the most diversification benefit if added to a portfolio of 50 stocks that was spread across industries? A fund that tracks the:

Distinguish between systematic and unsystematic risk. What are two other names for each? Give examples of each.

The returns from precious metals funds are quite similar across fund type.

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

Understanding Investments

Investment Alternatives

Indirect Investing

Securities Markets and Market Indexes

How Securities Are Traded

The Risk and Return From Investing

Portfolio Theory

Capital Market Theory and Asset Pricing Models

Common Stock Valuation

Common Stocks: Analysis and Strategy

Market Efficiency

Economymarket Analysis

Sectorindustry Analysis

Company Analysis

Technical Analysis

Bond Yields and Prices

Bonds: Analysis and Strategy

Options

Futures Contracts

Managing Your Financial Assets

Evaluation of Investment Performance

Filters