Question 1

Portfolio variance is also called

Accepted Answer

A)  market risk. 
B)  total risk. 
C)  business risk. 
D)  diversifiable risk. 
A)  market risk. 
B)  total risk. 
C)  business risk. 
D)  diversifiable risk. B

Question 2

The father of modern portfolio theory is

Accepted Answer

A)  Harry Markowitz. 
B)  Harry Roberts. 
C)  Louis Fritzmeier. 
D)  Don Chambers. 
A)  Harry Markowitz. 
B)  Harry Roberts. 
C)  Louis Fritzmeier. 
D)  Don Chambers. A

Question 3

One security may dominate another even though they have the same expected return.

Accepted Answer

A) True 
 B)False  True

Question 4

A pairwise comparison of security return correlations is known as a

Accepted Answer

A)  correlation matrix. 
B)  efficiency table. 
C)  standard deviation layout. 
D)  exact probability table. 
A)  correlation matrix. 
B)  efficiency table. 
C)  standard deviation layout. 
D)  exact probability table.

Question 5

Which of the following relationships between two investments would generate average returns and no risk?

Accepted Answer

A)  +1 correlation 
B)  -1 correlation 
C)  0 correlation 
D)  +.25 correlation 
A)  +1 correlation 
B)  -1 correlation 
C)  0 correlation 
D)  +.25 correlation

Question 6

One of the central ideas behind portfolio construction is

Accepted Answer

A)  dominance 
B)  utility 
C)  systematic correlation 
D)  the single index model 
A)  dominance 
B)  utility 
C)  systematic correlation 
D)  the single index model

Question 7

Which of the following is most accurate?

Accepted Answer

A)  If correlation is positive, covariance is positive. 
B)  If correlation is positive, covariance may be positive or negative. 
C)  If correlation is positive, covariance is negative. 
D)  If correlation is positive, covariance will be smaller than correlation. 
A)  If correlation is positive, covariance is positive. 
B)  If correlation is positive, covariance may be positive or negative. 
C)  If correlation is positive, covariance is negative. 
D)  If correlation is positive, covariance will be smaller than correlation.

Question 8

The CAPM is often used to estimate beta.

Accepted Answer

A) True 
 B)False

Question 9

The capital market line is also known as:

Accepted Answer

A)  the relationship between portfolios along the efficient frontier. 
B)  the market portfolio. 
C)  the risk/return tradeoff. 
D)  shows the results of superfluous diversification. 
A)  the relationship between portfolios along the efficient frontier. 
B)  the market portfolio. 
C)  the risk/return tradeoff. 
D)  shows the results of superfluous diversification.

Question 10

The difference between the expected return on a stock with a beta of 1.0 and the risk free rate is the

Accepted Answer

A)  alpha. 
B)  market risk premium. 
C)  undiversifiable return. 
D)  expected return. 
A)  alpha. 
B)  market risk premium. 
C)  undiversifiable return. 
D)  expected return.

Question 11

Evans and Archer published a famous study dealing with

Accepted Answer

A)  naïve diversification. 
B)  the variance/covariance matrix. 
C)  the reversion of beta to the mean. 
D)  the nonstationarity of beta. 
A)  naïve diversification. 
B)  the variance/covariance matrix. 
C)  the reversion of beta to the mean. 
D)  the nonstationarity of beta.

Question 12

Equity risk premium refers to the difference in the average return between stocks and some measure of the riskfree rate, such as Treasury bonds or bills.

Accepted Answer

A) True 
 B)False

Question 13

The CAPM implies a particular dividend growth rate.

Accepted Answer

A) True 
 B)False

Question 14

High correlations are valuable in portfolio risk reduction.

Accepted Answer

A) True 
 B)False

Question 15

A line from the risk free rate that is tangent to the efficient frontier for risky securities is

Accepted Answer

A)  the capital market line. 
B)  the minimum variance line. 
C)  the isoquant. 
D)  the utility curve. 
A)  the capital market line. 
B)  the minimum variance line. 
C)  the isoquant. 
D)  the utility curve.

Question 16

In the absence of a risk free rate, the minimum variance portfolio is always dominated by another portfolio.

Accepted Answer

A) True 
 B)False

Question 17

The returns on most common stock are positively correlated.

Accepted Answer

A) True 
 B)False

Question 18

The collection of eligible investments from which a portfolio is formed is the

Accepted Answer

A)  efficient frontier. 
B)  security universe. 
C)  dominated set. 
D)  lending portfolio. 
A)  efficient frontier. 
B)  security universe. 
C)  dominated set. 
D)  lending portfolio.

Question 19

The equation for the variance of a five-security portfolio has _____ correlation terms.

Accepted Answer

A)  5 
B)  10 
C)  15 
D)  20 
A)  5 
B)  10 
C)  15 
D)  20

Question 20

The variance of a portfolio's returns is a weighted average of the component variances.

Accepted Answer

A) True 
 B)False

Exam 16: Why Diversify

Portfolio variance is also called

The father of modern portfolio theory is

One security may dominate another even though they have the same expected return.

A pairwise comparison of security return correlations is known as a

Which of the following relationships between two investments would generate average returns and no risk?

One of the central ideas behind portfolio construction is

Which of the following is most accurate?

The CAPM is often used to estimate beta.

The capital market line is also known as:

The difference between the expected return on a stock with a beta of 1.0 and the risk free rate is the

Evans and Archer published a famous study dealing with

Equity risk premium refers to the difference in the average return between stocks and some measure of the riskfree rate, such as Treasury bonds or bills.

The CAPM implies a particular dividend growth rate.

High correlations are valuable in portfolio risk reduction.

A line from the risk free rate that is tangent to the efficient frontier for risky securities is

In the absence of a risk free rate, the minimum variance portfolio is always dominated by another portfolio.

The returns on most common stock are positively correlated.

The collection of eligible investments from which a portfolio is formed is the

The equation for the variance of a five-security portfolio has _____ correlation terms.

The variance of a portfolio's returns is a weighted average of the component variances.

Understanding Risk and Return

The Marketplace

Bond Fundamentals

Common Stock

Market Mechanics

Fundamental Stock Analysis

Valuation Tools

Technical Analysis

Market Efficiency

Behavioral Finance

Gathering Investment Information

Market Indexes

Convertible Securities

Investing Internationally

Derivative Assets

Managing the Equity Portfolio

Managing the Fixed Income Portfolio

Mortgage-Backed Securities

Investment Companies

Performance Measurement and Presentation

Filters