Question 1

Under the Markowitz model, investors:

Accepted Answer

A)  are assumed to be risk-seekers. 
B)  are not allowed to use leverage. 
C)  are assumed to be institutional investors. 
D)  are always better off if they select portfolios consisting of multiple securities. 
A)  are assumed to be risk-seekers. 
B)  are not allowed to use leverage. 
C)  are assumed to be institutional investors. 
D)  are always better off if they select portfolios consisting of multiple securities.

Question 2

Due to its complexity, the Markowitz model is no longer used by investors.

Accepted Answer

A) True 
 B)False

Question 3

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 4

An investor purchased shares in a precious metals fund but lost money even though the price of precious metals advanced considerably. What type of precious metals fund did the investor likely invest in, and what explains the performance?

Accepted Answer

An equity fund, which holds the common s

Question 5

Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by:

Accepted Answer

A)  aggressive investors. 
B)  conservative investors. 
C)  risk-averse investors. 
D)  defensive investors. 
A)  aggressive investors. 
B)  conservative investors. 
C)  risk-averse investors. 
D)  defensive investors.

Question 6

Bob holds a portfolio of 20 stocks from different industries, whereas Sharon holds only one stock in her portfolio. Assuming they each add a stock to their portfolio, which of the following is most likely? Relative to Bob's portfolio, Sharon's portfolio will experience the:

Accepted Answer

A)  larger increase in total risk. 
B)  larger increase in return. 
C)  larger decrease in total risk. 
D)  larger decrease in market risk. 
A)  larger increase in total risk. 
B)  larger increase in return. 
C)  larger decrease in total risk. 
D)  larger decrease in market risk.

Question 7

Aggressive investors would select portfolios on the left end of the Markowitz efficient frontier.

Accepted Answer

A) True 
 B)False

Question 8

Explain what is efficient about the efficient frontier.

Accepted Answer

Any portfolio on the efficient

Question 9

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 10

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 11

Which of the following is true regarding the Markowitz model?

Accepted Answer

A)  It fully addresses the use of leverage. 
B)  The inputs to the model are the portfolio asset weights. 
C)  An investor's optimal portfolio occurs where the investor's indifference curve is tangent to the efficient frontier. 
D)  Markowitz diversification is inefficient diversification. 
A)  It fully addresses the use of leverage. 
B)  The inputs to the model are the portfolio asset weights. 
C)  An investor's optimal portfolio occurs where the investor's indifference curve is tangent to the efficient frontier. 
D)  Markowitz diversification is inefficient diversification.

Question 12

Assume stock A, stock B and stock C are all positively correlated. A fourth stock is being considered for addition to the portfolio, either stock D or stock E. Both D and E have expected returns of 12%. If stock D is positively correlated with stock A, B, and C, and E is negatively correlated with A, B, and C, which stock should be added to the portfolio? Why?

Accepted Answer

Add stock E. The expected retu

Question 13

For U.S. investors, the diversification benefits of emerging markets have decreased over time.

Accepted Answer

A) True 
 B)False

Question 14

The efficient set of portfolios represents:

Accepted Answer

A)  investor preferences, whereas indifference curves reflect portfolio possibilities. 
B)  portfolio possibilities, whereas indifference curves reflect investor preferences. 
C)  investor risk, whereas indifference curves reflect portfolio return. 
D)  portfolio return, whereas indifference curves reflect investor preferences. 
A)  investor preferences, whereas indifference curves reflect portfolio possibilities. 
B)  portfolio possibilities, whereas indifference curves reflect investor preferences. 
C)  investor risk, whereas indifference curves reflect portfolio return. 
D)  portfolio return, whereas indifference curves reflect investor preferences.

Question 15

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 16

An indifference curve shows:

Accepted Answer

A)  the one most desirable portfolio for an investor. 
B)  all combinations of portfolios that are equally desirable to an investor. 
C)  all combinations of portfolios that are equally desirable to all investors. 
D)  the one most desirable portfolio for all investors. 
A)  the one most desirable portfolio for an investor. 
B)  all combinations of portfolios that are equally desirable to an investor. 
C)  all combinations of portfolios that are equally desirable to all investors. 
D)  the one most desirable portfolio for all investors.

Question 17

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 18

Asset allocation is one of the most widely used applications of:

Accepted Answer

A)  the Capital Asset Pricing Model. 
B)  random diversification. 
C)  passive portfolio approach. 
D)  modern portfolio theory. 
A)  the Capital Asset Pricing Model. 
B)  random diversification. 
C)  passive portfolio approach. 
D)  modern portfolio theory.

Question 19

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 ar

Question 20

Which of the following best approximates the typical correlation between the S&P 500 and the MSCI EAFE Index?

Accepted Answer

A)  -50% 
B)  0% 
C)  25% 
D)  70% 
A)  -50% 
B)  0% 
C)  25% 
D)  70%

Exam 8: Portfolio Selection and Asset Allocation

Under the Markowitz model, investors:

Due to its complexity, the Markowitz model is no longer used by investors.

The beta for the S&P 500 is generally considered to be:

An investor purchased shares in a precious metals fund but lost money even though the price of precious metals advanced considerably. What type of precious metals fund did the investor likely invest in, and what explains the performance?

Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by:

Bob holds a portfolio of 20 stocks from different industries, whereas Sharon holds only one stock in her portfolio. Assuming they each add a stock to their portfolio, which of the following is most likely? Relative to Bob's portfolio, Sharon's portfolio will experience the:

Aggressive investors would select portfolios on the left end of the Markowitz efficient frontier.

Explain what is efficient about the efficient frontier.

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

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

Which of the following is true regarding the Markowitz model?

For U.S. investors, the diversification benefits of emerging markets have decreased over time.

The efficient set of portfolios represents:

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

An indifference curve shows:

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

Asset allocation is one of the most widely used applications of:

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?

Which of the following best approximates the typical correlation between the S&P 500 and the MSCI EAFE Index?

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

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