Question 1

It would be impossible to create an asset allocation plan with Markowitz analysis.

Accepted Answer

A) True 
 B)False

Question 2

Different investors estimate the inputs to the Markowitz model differently because:

Accepted Answer

A)  investors have their own risk/return preferences. 
B)  every investor has access to different information about securities. 
C)  there is an inherent uncertainty in security analysis. 
D)  there is a random selection process used by individual investors. 
A)  investors have their own risk/return preferences. 
B)  every investor has access to different information about securities. 
C)  there is an inherent uncertainty in security analysis. 
D)  there is a random selection process used by individual investors.

Question 3

Because of increasing correlation between U.S. markets and foreign markets, most professional investors now recommend:

Accepted Answer

A)  zero exposure to foreign markets for the foreseeable future. 
B)  replacing foreign stock exposure with U.S. Treasury bonds. 
C)  maintaining some reasonable exposure to foreign markets. 
D)  replacing foreign stock exposure with investment grade sovereign. 
A)  zero exposure to foreign markets for the foreseeable future. 
B)  replacing foreign stock exposure with U.S. Treasury bonds. 
C)  maintaining some reasonable exposure to foreign markets. 
D)  replacing foreign stock exposure with investment grade sovereign.

Question 4

Which of the following is not true regarding Markowitz portfolio theory? The Markowitz model:

Accepted Answer

A)  is considered a three-parameter model. 
B)  implies that no portfolio on the efficient frontier dominates any other portfolio on the efficient frontier. 
C)  is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks. 
D)  generates an entire set, or efficient frontier, of portfolios. 
A)  is considered a three-parameter model. 
B)  implies that no portfolio on the efficient frontier dominates any other portfolio on the efficient frontier. 
C)  is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks. 
D)  generates an entire set, or efficient frontier, of portfolios.

Question 5

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 6

For an investor in a life-cycle fund, the bond allocation generally:

Accepted Answer

A)  is 0%. 
B)  increases over time. 
C)  decreases over time. 
D)  remains constant over time. 
A)  is 0%. 
B)  increases over time. 
C)  decreases over time. 
D)  remains constant over time.

Question 7

Precious metal mutual funds tend to track the price of gold more closely than other types of precious metal funds.

Accepted Answer

A) True 
 B)False

Question 8

Precious metal bullion funds hold physical precious metals.

Accepted Answer

A) True 
 B)False

Question 9

Real estate is generally not positively correlated with the performance of stocks.

Accepted Answer

A) True 
 B)False

Question 10

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 11

The Markowitz model does not depend on the assumption of normally distributed security returns.

Accepted Answer

A) True 
 B)False

Question 12

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 13

In the past 20 years, the benefits of international diversification have:

Accepted Answer

A)  increased. 
B)  decreased. 
C)  disappeared. 
D)  become more volatile. 
A)  increased. 
B)  decreased. 
C)  disappeared. 
D)  become more volatile.

Question 14

The efficient frontier has a convex shape.

Accepted Answer

A) True 
 B)False

Question 15

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 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

Which of the following statements regarding indifference curves is not true?

Accepted Answer

A)  Investors have a finite number of indifference curves. 
B)  The greater the indifference curve's slope, the greater the investor's risk aversion. 
C)  The indifference curves for all risk-averse investors will be upward sloping. 
D)  Indifference curves cannot intersect. 
A)  Investors have a finite number of indifference curves. 
B)  The greater the indifference curve's slope, the greater the investor's risk aversion. 
C)  The indifference curves for all risk-averse investors will be upward sloping. 
D)  Indifference curves cannot intersect.

Question 18

Indifference curves for a risk-averse individual:

Accepted Answer

A)  will be the same as the indifference curves for any other risk-averse individual. 
B)  have a negative slope. 
C)  frequently intersect. 
D)  are convex. 
A)  will be the same as the indifference curves for any other risk-averse individual. 
B)  have a negative slope. 
C)  frequently intersect. 
D)  are convex.

Question 19

A well-diversified portfolio will typically consist of a mix of small, mid, and large cap stocks, both U.S. and foreign, as well as corporate and U.S. Treasury bonds, real estate, and commodities.

Accepted Answer

A) True 
 B)False

Question 20

Given the following information, calculate the expected return of Portfolio ABC. Expected return of stock A = 10%; expected return of stock B = 15%; expected return of stock C = 6%. 40 percent of the portfolio is invested in A, 40 percent is invested in B and 20 percent is invested in C.

Accepted Answer

Expected portfolio r

Exam 8: Portfolio Selection and Asset Allocation

It would be impossible to create an asset allocation plan with Markowitz analysis.

Different investors estimate the inputs to the Markowitz model differently because:

Because of increasing correlation between U.S. markets and foreign markets, most professional investors now recommend:

Which of the following is not true regarding Markowitz portfolio theory? The Markowitz model:

Systematic risk is also called:

For an investor in a life-cycle fund, the bond allocation generally:

Precious metal mutual funds tend to track the price of gold more closely than other types of precious metal funds.

Precious metal bullion funds hold physical precious metals.

Real estate is generally not positively correlated with the performance of stocks.

Which of the following statements is true regarding TIPS?

The Markowitz model does not depend on the assumption of normally distributed security returns.

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

In the past 20 years, the benefits of international diversification have:

The efficient frontier has a convex shape.

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?

The optimal portfolio for a risk-averse investor:

Which of the following statements regarding indifference curves is not true?

Indifference curves for a risk-averse individual:

A well-diversified portfolio will typically consist of a mix of small, mid, and large cap stocks, both U.S. and foreign, as well as corporate and U.S. Treasury bonds, real estate, and commodities.

Given the following information, calculate the expected return of Portfolio ABC. Expected return of stock A = 10%; expected return of stock B = 15%; expected return of stock C = 6%. 40 percent of the portfolio is invested in A, 40 percent is invested in B and 20 percent is invested in C.

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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