Question 1

When the Capital Asset Pricing Model is depicted graphically, the result is the

Accepted Answer

A)  alpha- beta line. 
B)  coefficient of variation line. 
C)  security market line. 
D)  standard deviation line. 
A)  alpha- beta line. 
B)  coefficient of variation line. 
C)  security market line. 
D)  standard deviation line. C

Question 2

Explain the relationship between correlation, diversification, and risk reduction.

Accepted Answer

Correlation is a statistic that measures the relationship between returns on assets. Positively correlated assets move together; negatively correlated opposites move in opposite directions. Diversification reduces risk most effectively when the assets have low or negative coefficients of correlation.

Question 3

Studies have shown that investing in different industries as well as different countries reduces portfolio risk.

Accepted Answer

A) True 
 B)False  True

Question 4

Combining uncorrelated assets should

Accepted Answer

A)  not change the overall risk level of a portfolio. 
B)  increase the overall risk level of a portfolio. 
C)  decrease the overall risk level of a portfolio. 
D)  cause the other assets in the portfolio to become positively related. 
A)  not change the overall risk level of a portfolio. 
B)  increase the overall risk level of a portfolio. 
C)  decrease the overall risk level of a portfolio. 
D)  cause the other assets in the portfolio to become positively related.

Question 5

To obtain the maximum reduction in risk, an investor should combine assets that

Accepted Answer

A)  are negatively correlated. 
B)  have a correlation coefficient of negative one. 
C)  are uncorrelated. 
D)  have a correlation coefficient of positive one. 
A)  are negatively correlated. 
B)  have a correlation coefficient of negative one. 
C)  are uncorrelated. 
D)  have a correlation coefficient of positive one.

Question 6

Historical betas are always reliable predictors of future return fluctuations.

Accepted Answer

A) True 
 B)False

Question 7

What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk- free rate of 4%?

Accepted Answer

A)  8.72%. 
B)  12.72%. 
C)  8.36%. 
D)  4.36%. 
A)  8.72%. 
B)  12.72%. 
C)  8.36%. 
D)  4.36%.

Question 8

The opportunities to earn excess returns in foreign investments continue to grow.

Accepted Answer

A) True 
 B)False

Question 9

Portfolio objectives should be established independently of tax considerations.

Accepted Answer

A) True 
 B)False

Question 10

Traditional portfolio management

Accepted Answer

A)  includes only diversified bonds in a laddered portfolio. 
B)  typically centres on interindustry diversification. 
C)  is based on statistical measures to develop the portfolio plan. 
D)  concentrates on only the most recent "hot" sectors of the market. 
A)  includes only diversified bonds in a laddered portfolio. 
B)  typically centres on interindustry diversification. 
C)  is based on statistical measures to develop the portfolio plan. 
D)  concentrates on only the most recent "hot" sectors of the market.

Question 11

The Franko Company has a beta of 1.09. By what percent will the rate of return on the stock of Franko Company increase if the market rate of return rises by 3%?

Accepted Answer

A)  4.09%. 
B)  1.91%. 
C)  2.75%. 
D)  3.27%. 
A)  4.09%. 
B)  1.91%. 
C)  2.75%. 
D)  3.27%.

Question 12

Portfolios falling to the left of the efficient frontier

Accepted Answer

A)  would be desirable if only they were possible. 
B)  do not use all of the assets in the portfolio. 
C)  fall within the set of feasible portfolios. 
D)  have too much risk for the expected return. 
A)  would be desirable if only they were possible. 
B)  do not use all of the assets in the portfolio. 
C)  fall within the set of feasible portfolios. 
D)  have too much risk for the expected return.

Question 13

Diversifiable risk is also called systematic risk.

Accepted Answer

A) True 
 B)False

Question 14

A share with a beta of 1.3 is less risky than a share with a beta of 0.42.

Accepted Answer

A) True 
 B)False

Question 15

The beta of the market is

Accepted Answer

A)  1.0. 
B)  - 1.0. 
C)  0.0. 
D)  undefined. 
A)  1.0. 
B)  - 1.0. 
C)  0.0. 
D)  undefined.

Question 16

The optimal portfolio for an individual investor is represented by the point that lies on the

Accepted Answer

A)  utility curve which is just tangent to the efficient frontier. 
B)  lowest possible utility curve and connects to the efficient frontier. 
C)  utility curve which represents the highest possible rate of return within the feasible set of risk- return options. 
D)  utility curve which is just tangent to the right side of the feasible set of risk- return options. 
A)  utility curve which is just tangent to the efficient frontier. 
B)  lowest possible utility curve and connects to the efficient frontier. 
C)  utility curve which represents the highest possible rate of return within the feasible set of risk- return options. 
D)  utility curve which is just tangent to the right side of the feasible set of risk- return options.

Question 17

In designing a portfolio, the only relevant risk is

Accepted Answer

A)  unsystematic risk. 
B)  total risk. 
C)  non- diversifiable risk. 
D)  event risk. 
A)  unsystematic risk. 
B)  total risk. 
C)  non- diversifiable risk. 
D)  event risk.

Question 18

The best share to own when the share market is at a peak and is expected to decline in value is one with a beta of

Accepted Answer

A)  - 1.0. 
B)  - 0.5. 
C)  +1.5. 
D)  +1.0. 
A)  - 1.0. 
B)  - 0.5. 
C)  +1.5. 
D)  +1.0.

Question 19

Betas must be positive numbers.

Accepted Answer

A) True 
 B)False

Question 20

A beta of 0.5 means that a share is half as risky as the overall market.

Accepted Answer

A) True 
 B)False

When the Capital Asset Pricing Model is depicted graphically, the result is the

Explain the relationship between correlation, diversification, and risk reduction.

Studies have shown that investing in different industries as well as different countries reduces portfolio risk.

Combining uncorrelated assets should

To obtain the maximum reduction in risk, an investor should combine assets that

Historical betas are always reliable predictors of future return fluctuations.

What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk- free rate of 4%?

The opportunities to earn excess returns in foreign investments continue to grow.

Portfolio objectives should be established independently of tax considerations.

Traditional portfolio management

The Franko Company has a beta of 1.09. By what percent will the rate of return on the stock of Franko Company increase if the market rate of return rises by 3%?

Portfolios falling to the left of the efficient frontier

Diversifiable risk is also called systematic risk.

A share with a beta of 1.3 is less risky than a share with a beta of 0.42.

The beta of the market is

The optimal portfolio for an individual investor is represented by the point that lies on the

In designing a portfolio, the only relevant risk is

The best share to own when the share market is at a peak and is expected to decline in value is one with a beta of

Betas must be positive numbers.

A beta of 0.5 means that a share is half as risky as the overall market.

The Investment Environment

Markets and Transactions

Investment Information and Securities Transactions

Return and Risk

Shares

Analysing Shares

Share Valuation

Technical Analysis, Market Efficiency and Behavioural Finance

Fixed-Income Securities

Bond Valuation

Managed Funds: Professionally Managed Portfolios

Managing Your Own Portfolio

Options: Puts and Calls

Commodities and Financial Futures

Filters

Exam 5: Modern Portfolio Concepts

When the Capital Asset Pricing Model is depicted graphically, the result is the

Explain the relationship between correlation, diversification, and risk reduction.

Studies have shown that investing in different industries as well as different countries reduces portfolio risk.

Combining uncorrelated assets should

To obtain the maximum reduction in risk, an investor should combine assets that

Historical betas are always reliable predictors of future return fluctuations.

What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk- free rate of 4%?

The opportunities to earn excess returns in foreign investments continue to grow.

Portfolio objectives should be established independently of tax considerations.

Traditional portfolio management

The Franko Company has a beta of 1.09. By what percent will the rate of return on the stock of Franko Company increase if the market rate of return rises by 3%?

Portfolios falling to the left of the efficient frontier

Diversifiable risk is also called systematic risk.

A share with a beta of 1.3 is less risky than a share with a beta of 0.42.

The beta of the market is

The optimal portfolio for an individual investor is represented by the point that lies on the

In designing a portfolio, the only relevant risk is

The best share to own when the share market is at a peak and is expected to decline in value is one with a beta of

Betas must be positive numbers.

A beta of 0.5 means that a share is half as risky as the overall market.

The Investment Environment

Markets and Transactions

Investment Information and Securities Transactions

Return and Risk

Shares

Analysing Shares

Share Valuation

Technical Analysis, Market Efficiency and Behavioural Finance

Fixed-Income Securities

Bond Valuation

Managed Funds: Professionally Managed Portfolios

Managing Your Own Portfolio

Options: Puts and Calls

Commodities and Financial Futures

Filters