Question 1

Explain what is meant by an optimal portfolio and how an optimal portfolio is selected from all the portfolios available on the Markowitz efficient frontier.

Accepted Answer

a. Optimal portfolio.
b. Markowitz efficient portfolio.
c. Feasible set of portfolios.
d. Efficient set of portfolios.

Question 2

The arithmetic average can be thought of the mean value of the withdrawals that can be made at the end of each interval while maintaining the initial portfolio value intact.

Accepted Answer

A) True 
 B)False  True

Question 3

The total risk of a portfolio consists of:

Accepted Answer

A)  Diversifiable risk. 
B)  Nondiversifiable risk. 
C)  Statistical risk. 
D)  a and b only. 
E)  All of the above. 
A)  Diversifiable risk. 
B)  Nondiversifiable risk. 
C)  Statistical risk. 
D)  a and b only. 
E)  All of the above. D

Question 4

To construct an efficient portfolio of risky assets, it is assumed that investors are:

Accepted Answer

A)  Risk lovers. 
B)  Risk neutral. 
C)  Risk averse. 
D)  Riskless. 
E)  None of the above. 
A)  Risk lovers. 
B)  Risk neutral. 
C)  Risk averse. 
D)  Riskless. 
E)  None of the above.

Question 5

The risk of a portfolio can be quantified by:

Accepted Answer

A)  Specifying the probability associated with each possible future outcome. 
B)  The dispersion of the possible returns below the expected value. 
C)  The variance of the portfolio returns. 
D)  The standard deviation of portfolio returns. 
E)  All of the above. 
A)  Specifying the probability associated with each possible future outcome. 
B)  The dispersion of the possible returns below the expected value. 
C)  The variance of the portfolio returns. 
D)  The standard deviation of portfolio returns. 
E)  All of the above.

Question 6

Portfolio theory deals with:

Accepted Answer

A)  The selection of portfolios that maximize expected returns consistent with individually acceptable levels of risk. 
B)  The relationship that should exist between security returns and risk. 
C)  The effects of investor decisions on security prices. 
D)  a and b only. 
E)  All of the above. 
A)  The selection of portfolios that maximize expected returns consistent with individually acceptable levels of risk. 
B)  The relationship that should exist between security returns and risk. 
C)  The effects of investor decisions on security prices. 
D)  a and b only. 
E)  All of the above.

Question 7

The standard deviation of portfolio return is a measure of:

Accepted Answer

A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Total risk. 
D)  Statistical risk. 
E)  None of the above. 
A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Total risk. 
D)  Statistical risk. 
E)  None of the above.

Question 8

The highest expected return for all feasible portfolios with the same risk is called:

Accepted Answer

A)  Feasible portfolios. 
B)  Markowitz efficient portfolios. 
C)  Mean-variance efficient portfolios. 
D)  b and c only. 
E)  All of the above. 
A)  Feasible portfolios. 
B)  Markowitz efficient portfolios. 
C)  Mean-variance efficient portfolios. 
D)  b and c only. 
E)  All of the above.

Question 9

The standard deviation is defined as the square root of the correlation coefficient.

Accepted Answer

A) True 
 B)False

Question 10

On the average, approximately 40% of the single-security risk is eliminated by forming randomly selected portfolios of 5 stocks.

Accepted Answer

A) True 
 B)False

Question 11

Together, portfolio and capital market theories provide a framework to:

Accepted Answer

A)  Specify and measure the investment risk. 
B)  Quantify the expected return on a portfolio. 
C)  Develop relationships between risk and expected return. 
D)  Quantify the cost of capital. 
E)  All of the above. 
A)  Specify and measure the investment risk. 
B)  Quantify the expected return on a portfolio. 
C)  Develop relationships between risk and expected return. 
D)  Quantify the cost of capital. 
E)  All of the above.

Question 12

When the return to be realized in the future is known with certainty today, the asset is said to be:

Accepted Answer

A)  Risky. 
B)  Riskfree. 
C)  Neutral. 
D)  b and c only. 
E)  None of the above. 
A)  Risky. 
B)  Riskfree. 
C)  Neutral. 
D)  b and c only. 
E)  None of the above.

Question 13

Explain the differences and similarities between the portfolio theory and capital market theory.

Accepted Answer

a. Expected return and risk.
b

Question 14

The investment return can be measured in terms of:

Accepted Answer

A)  An arithmetic average rate of return. 
B)  A time-weighted rate of return. 
C)  A dollar-weighted rate of return. 
D)  All of the above. 
E)  None of the above. 
A)  An arithmetic average rate of return. 
B)  A time-weighted rate of return. 
C)  A dollar-weighted rate of return. 
D)  All of the above. 
E)  None of the above.

Question 15

Even securities issued by the U.S. government are risky assets, because:

Accepted Answer

A)  The return will depend on the price of the U.S. government bond if it is held to maturity. 
B)  The return is unknown if the bond is held for only one year. 
C)  Changes in interest rates will affect the price of the bond. 
D)  All of the above. 
E)  None of the above. 
A)  The return will depend on the price of the U.S. government bond if it is held to maturity. 
B)  The return is unknown if the bond is held for only one year. 
C)  Changes in interest rates will affect the price of the bond. 
D)  All of the above. 
E)  None of the above.

Question 16

Graphically, all the Markowitz efficient portfolios lie:

Accepted Answer

A)  On the boundary of the set of feasible portfolios. 
B)  Below the efficient frontier. 
C)  Above the efficient frontier. 
D)  None of the above. 
E)  All of the above. 
A)  On the boundary of the set of feasible portfolios. 
B)  Below the efficient frontier. 
C)  Above the efficient frontier. 
D)  None of the above. 
E)  All of the above.

Question 17

In constructing Markowitz efficient portfolios it is assumed that:

Accepted Answer

A)  An investor's decision is affected by the expected return and risk. 
B)  Investors are risk averse. 
C)  Investors seek to achieve the highest expected return for a given level of risk. 
D)  a and b only. 
E)  All of the above. 
A)  An investor's decision is affected by the expected return and risk. 
B)  Investors are risk averse. 
C)  Investors seek to achieve the highest expected return for a given level of risk. 
D)  a and b only. 
E)  All of the above.

Question 18

Diversification reduces the variability of returns if the correlation among security returns is:

Accepted Answer

A)  High. 
B)  Low. 
C)  The same. 
D)  Indifferent. 
E)  None of the above. 
A)  High. 
B)  Low. 
C)  The same. 
D)  Indifferent. 
E)  None of the above.

Question 19

The ratio of the gain on an investment, which arises either from a change in the investment's value or a cash distribution, to the initial value of the investment is known as the:

Accepted Answer

A)  Return. 
B)  Risk. 
C)  Expected return. 
D)  Dispersion. 
E)  None of the above. 
A)  Return. 
B)  Risk. 
C)  Expected return. 
D)  Dispersion. 
E)  None of the above.

Question 20

The development of the theoretical relationship between risk and expected return is built on the portfolio theory and capital market theory.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Return Theories: I

Explain what is meant by an optimal portfolio and how an optimal portfolio is selected from all the portfolios available on the Markowitz efficient frontier.

The arithmetic average can be thought of the mean value of the withdrawals that can be made at the end of each interval while maintaining the initial portfolio value intact.

The total risk of a portfolio consists of:

To construct an efficient portfolio of risky assets, it is assumed that investors are:

The risk of a portfolio can be quantified by:

Portfolio theory deals with:

The standard deviation of portfolio return is a measure of:

The highest expected return for all feasible portfolios with the same risk is called:

The standard deviation is defined as the square root of the correlation coefficient.

On the average, approximately 40% of the single-security risk is eliminated by forming randomly selected portfolios of 5 stocks.

Together, portfolio and capital market theories provide a framework to:

When the return to be realized in the future is known with certainty today, the asset is said to be:

Explain the differences and similarities between the portfolio theory and capital market theory.

The investment return can be measured in terms of:

Even securities issued by the U.S. government are risky assets, because:

Graphically, all the Markowitz efficient portfolios lie:

In constructing Markowitz efficient portfolios it is assumed that:

Diversification reduces the variability of returns if the correlation among security returns is:

The ratio of the gain on an investment, which arises either from a change in the investment's value or a cash distribution, to the initial value of the investment is known as the:

The development of the theoretical relationship between risk and expected return is built on the portfolio theory and capital market theory.

Introduction

Overview of Market Participants and Financial Innovation

Depository Institutions

Insurance Companies

Asset Management Firms

Investment Banking Firms

Primary and Secondary Markets

Risk and Return Theories: II

Introduction to Financial Futures Markets

Introduction to Options Markets

Introduction to the Swaps, Caps, and Floors Markets

Common Stock Market: I

Common Stock Market: II

Stock Options Market

The Market for Stock Index Products and Other Equity Derivatives

The Theory and Structure of Interest Rates

Valuation of Debt Contracts and Their Price Volatility Characteristics

The Term Structure of Interest Rates

Money Markets

Treasury and Agency Securities Markets

Corporate Senior Instruments Markets: I

Corporate Senior Instruments Markets: II

Municipal Securities Markets

The Residential Mortgage Market

The Market for Residential Mortgage-Backed Securities

Market for Asset-Backed Securities

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

International Bond Markets

International Bond Markets

Market for Interest Rate Risk Transfer Vehicles: OTC Instruments

The Market for Foreign Exchange and Risk Control Instruments

Filters