Question 1

Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s).

Accepted Answer

A) One 
B) Two 
C) Three 
D) Four 
E) Five 
A) One 
B) Two 
C) Three 
D) Four 
E) Five

Question 2

Exhibit 7A.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The general equation for the weight of the first security to achieve the minimum variance (in a two stock portfolio) is given by:
WS1U1B11S1U1B0 = [E($\sigma$S1U1B12S1U1B0)S1U1P12S1S1P0 - rS1U1B11.2S1U1B0 E($\sigma$S1U1B11S1U1B0)E($\sigma$S1U1B12S1U1B0)] -[E($\sigma$S1U1B11S1U1B0)S1U1P12S1S1P0 + E($\sigma$S1U1B12S1U1B0)S1U1P12S1S1P0 - 2 rS1U1B11.2S1U1B0E($\sigma$S1U1B11S1U1B0)E($\sigma$S1U1B12S1U1B0)]
-Refer to Exhibit 7A.1. What weight of security 1 gives the minimum portfolio variance when r1.2 = .60, E($\sigma$1) = .10 and E($\sigma$2) = .16?

Accepted Answer

A) .0244 
B) .3679 
C) .5697 
D) .6309 
E) .9756 
A) .0244 
B) .3679 
C) .5697 
D) .6309 
E) .9756

Question 3

A portfolio is efficient if no other asset or portfolios offer higher expected return with the same (or lower) risk or lower risk with the same (or higher) expected return.

Accepted Answer

A) True 
 B)False

Question 4

Given the following weights and expected security returns, calculate the expected return for the portfolio. $$\begin{array} { c c } 
\text { Weight } & \text { Expected Return } \
\hline .20 & .06 \
.25 & .08 \
.30 & .10 \
.25 & .12
\end{array}$$

Accepted Answer

A) 0.085 
B) 0.090 
C) 0.092 
D) 0.097 
E) None of the above 
A) 0.085 
B) 0.090 
C) 0.092 
D) 0.097 
E) None of the above

Question 5

If the covariance of two stocks is positive, these stocks tend to move together over time.

Accepted Answer

A) True 
 B)False

Question 6

A measure that only considers deviations above the mean is semi-variance.

Accepted Answer

A) True 
 B)False

Question 7

Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.

Accepted Answer

A) True 
 B)False

Question 8

The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is not such any assumption?

Accepted Answer

A) Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. 
B) Investors maximize one-period expected utility. 
C) Investors estimate the risk of the portfolio on the basis of the variability of expected returns. 
D) Investors base decisions solely on expected return and risk. 
E) None of the above (that is, all are assumptions of the Markowitz model) 
A) Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period. 
B) Investors maximize one-period expected utility. 
C) Investors estimate the risk of the portfolio on the basis of the variability of expected returns. 
D) Investors base decisions solely on expected return and risk. 
E) None of the above (that is, all are assumptions of the Markowitz model)

Question 9

The optimal portfolio is identified at the point of tangency between the efficient frontier and the

Accepted Answer

A) highest possible utility curve. 
B) lowest possible utility curve. 
C) middle range utility curve. 
D) steepest utility curve. 
E) flattest utility curve. 
A) highest possible utility curve. 
B) lowest possible utility curve. 
C) middle range utility curve. 
D) steepest utility curve. 
E) flattest utility curve.

Question 10

When individuals evaluate their portfolios they should evaluate

Accepted Answer

A) All the U.S. and non-U.S. stocks. 
B) All marketable securities. 
C) All marketable securities and other liquid assets. 
D) All assets. 
E) All assets and liabilities. 
A) All the U.S. and non-U.S. stocks. 
B) All marketable securities. 
C) All marketable securities and other liquid assets. 
D) All assets. 
E) All assets and liabilities.

Question 11

Exhibit 7.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 8 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 15 \% \
\left( \sigma _ { \mathrm { A } } \right) = 7 \% & \left( \sigma _ { \mathrm { B } } \right) = 10 \% \
W _ { \mathrm { A } } = 0.4 & W _ { \mathrm { B } } = 0.6 \
\mathrm { COV } V _ { \mathrm { A,B } } = 0.0006
\end{array}$$
-Refer to Exhibit 7.5. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation ($\sigma$i), covariance (COVi,j), and asset weight (Wi) are as shown above?

Accepted Answer

A) 8.0% 
B) 12.2% 
C) 7.4% 
D) 9.1% 
E) 11.6% 
A) 8.0% 
B) 12.2% 
C) 7.4% 
D) 9.1% 
E) 11.6%

Question 12

The probability of an adverse outcome is a definition of

Accepted Answer

A) Statistics. 
B) Variance. 
C) Random. 
D) Risk. 
E) Semi-variance above the mean. 
A) Statistics. 
B) Variance. 
C) Random. 
D) Risk. 
E) Semi-variance above the mean.

Question 13

What is the expected return of the three stock portfolio described below? $$\begin{array} { l c c } 
\text { Common Stock } & \text { Market Value } & \text { Expected Return } \
\hline \text { Ando Inc. } & 95,000 & 12.0 \% \
\text { Bee Co. } & 32,000 & 8.75 \% \
\text { Cool Inc. } & 65,000 & 17.7 \%
\end{array}$$

Accepted Answer

A) 18.45% 
B) 12.82% 
C) 13.38% 
D) 15.27% 
E) 16.67% 
A) 18.45% 
B) 12.82% 
C) 13.38% 
D) 15.27% 
E) 16.67%

Question 14

A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.

Accepted Answer

A) True 
 B)False

Question 15

Exhibit 7.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 16 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 10 \% \
\left( \sigma _ { \mathrm { A } } \right) = 9 \% & \left( \sigma _ { \mathrm { B } } \right) = 7 \% \
W _ { \mathrm { A } } = 0.5 & W _ { \mathrm { B } } = 0.5 \
\mathrm { COV } V _ { \mathrm { A,B } } = 0.0009
\end{array}$$
-Refer to Exhibit 7.6. What is the standard deviation of this portfolio?

Accepted Answer

A) 6.08% 
B) 5.89% 
C) 7.06% 
D) 6.54% 
E) 7.26% 
A) 6.08% 
B) 5.89% 
C) 7.06% 
D) 6.54% 
E) 7.26%

Question 16

Exhibit 7.13
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period. $$\begin{array} { c c } 
\text { Probability } & \text { Return } \
\hline 0.10 & - .20 \
0.25 & - .05 \
0.40 & 0.15 \
0.25 & 0.30
\end{array}$$
-Refer to Exhibit 7.13. Calculate the expected return for Magnum Oil.

Accepted Answer

A) 5.0 
B) 10.3% 
C) 13.7% 
D) 17.5% 
E) 20.0% 
A) 5.0 
B) 10.3% 
C) 13.7% 
D) 17.5% 
E) 20.0%

Question 17

Exhibit 7.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 9 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 11 \% \
\left( \sigma _ { \mathrm { A } } \right) = 4 \% & \left( \sigma _ { \mathrm { B } } \right) = 6 \% \
W _ { \mathrm { A } } = 0.4 & W _ { \mathrm { B } } = 0.6 \
\mathrm { COV }
_ { A,B } = 0.0011
\end{array}$$
-Refer to Exhibit 7.3. What is the standard deviation of this portfolio?

Accepted Answer

A) 3.68% 
B) 4.56% 
C) 4.99% 
D) 5.16% 
E) 6.02% 
A) 3.68% 
B) 4.56% 
C) 4.99% 
D) 5.16% 
E) 6.02%

Question 18

Exhibit 7.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) $$\begin{array} { c c } 
\text { Asset } ( \mathrm { A } ) & \text { Asset } ( \mathrm { B } ) \
\hline \mathrm { E } \left( \mathrm { R } _ { \mathrm { A } } \right) = 10 \% & \mathrm { E } \left( \mathrm { R } _ { \mathrm { B } } \right) = 14 \% \
\left( \sigma _ { \mathrm { A } } \right) = 7 \% & \left( \sigma _ { \mathrm { B } } \right) = 8 \% \
W _ { \mathrm { A } } = 0.7 & W _ { \mathrm { B } } = 0.3 \
\mathrm { COV } \
\mathrm { A,B } & = 0.0013
\end{array}$$
-Refer to Exhibit 7.8. What is the standard deviation of this portfolio?

Accepted Answer

A) 4.51% 
B) 5.94% 
C) 6.75% 
D) 7.09% 
E) 8.62% 
A) 4.51% 
B) 5.94% 
C) 6.75% 
D) 7.09% 
E) 8.62%

Question 19

Exhibit 7B.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The general equation for the weight of the first security to achieve the minimum variance (in a two stock portfolio) is given by:
WS1U1B11S1U1B0 = [E($\sigma$S1U1B11S1U1B0)S1U1P12S1S1P0 - rS1U1B11.2S1U1B0 E($\sigma$S1U1B11S1U1B0) E($\sigma$S1U1B12S1U1B0)] - [E($\sigma$S1U1B11S1U1B0)S1U1P12S1S1P0 + E($\sigma$S1U1B12S1U1B0)S1U1P12S1S1P0 - 2 rS1U1B11.2S1U1B0 E($\sigma$S1U1B11S1U1B0) E($\sigma$S1U1B12S1U1B0)]
-Refer to Exhibit 7B.1. What is the value of W1 when r1.2 = -1 and E($\sigma$1) = .10 and E($\sigma$2) = .12?

Accepted Answer

A) 45.46% 
B) 50.00% 
C) 59.45% 
D) 54.55% 
E) 74.55% 
A) 45.46% 
B) 50.00% 
C) 59.45% 
D) 54.55% 
E) 74.55%

Question 20

The set of portfolios with the maximum rate of return for every given risk level is known as the optimal frontier.

Accepted Answer

A) True 
 B)False

Exam 7: An Introduction to Portfolio Management

Markowitz believes that any asset or portfolio of assets can be described by ____ parameter(s).

A portfolio is efficient if no other asset or portfolios offer higher expected return with the same (or lower) risk or lower risk with the same (or higher) expected return.

Given the following weights and expected security returns, calculate the expected return for the portfolio. Weight Expected Return .20 .06 .25 .08 .30 .10 .25 .12

If the covariance of two stocks is positive, these stocks tend to move together over time.

A measure that only considers deviations above the mean is semi-variance.

Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.

The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is not such any assumption?

The optimal portfolio is identified at the point of tangency between the efficient frontier and the

When individuals evaluate their portfolios they should evaluate

The probability of an adverse outcome is a definition of

What is the expected return of the three stock portfolio described below? Common Stock Market Value Expected Return Ando Inc. 95,000 12.0\% Bee Co. 32,000 8.75\% Cool Inc. 65,000 17.7\%

A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk.

Exhibit 7.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset () Asset () =16\% =10\% =9\% =7\% =0.5 =0.5 =0.0009 -Refer to Exhibit 7.6. What is the standard deviation of this portfolio?

Exhibit 7.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset () Asset () =9\% =11\% =4\% =6\% =0.4 =0.6 =0.0011 -Refer to Exhibit 7.3. What is the standard deviation of this portfolio?

Exhibit 7.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset () Asset () =10\% =14\% =7\% =8\% =0.7 =0.3 =0.0013 -Refer to Exhibit 7.8. What is the standard deviation of this portfolio?

The set of portfolios with the maximum rate of return for every given risk level is known as the optimal frontier.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

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