Question 1

Intel stock declined in value from $34 to $30 and paid a dividend of $1 per share. What is the rate of return on Intel stock?

Accepted Answer

A)  -13.33% 
B)  -8.82% 
C)  16.66% 
D)  -10% 
A)  -13.33% 
B)  -8.82% 
C)  16.66% 
D)  -10%

Question 2

For an investor's indifference curve

Accepted Answer

A)  each portfolio on the curve has the same standard deviation. 
B)  all portfolios on the curve are equally desirable. 
C)  he will choose the portfolio where his set of curves intersect. 
D)  he will prefer a portfolio that lies to the "southeast" of the curve. 
A)  each portfolio on the curve has the same standard deviation. 
B)  all portfolios on the curve are equally desirable. 
C)  he will choose the portfolio where his set of curves intersect. 
D)  he will prefer a portfolio that lies to the "southeast" of the curve.

Question 3

In a variance-covariance matrix of stock returns, the variances of the stock returns appear on the _______ of the matrix.

Accepted Answer

A)  columns 
B)  diagonal 
C)  rows 
D)  last row 
A)  columns 
B)  diagonal 
C)  rows 
D)  last row

Question 4

The probability distribution for a portfolio's returns can be approximated by the familiar bell-shaped curve known as a(n) _________.

Accepted Answer

A)  normal distribution 
B)  expected return vector 
C)  covariance matrix 
D)  correlation coefficient 
A)  normal distribution 
B)  expected return vector 
C)  covariance matrix 
D)  correlation coefficient

Question 5

Why are the indifference curves of typical investors assumed to slope upward and to the right?

Accepted Answer

A)  As the standard deviation of portfolio returns increases, risk averse investors require lower expected returns to maintain their level of satisfaction. 
B)  As the returns of a portfolio increase, risk averse investors require the same not more risk. 
C)  As the risk of a portfolio increases with the rate of return, risk averse investors will move to a higher indifference curve. 
D)  As the standard deviation of portfolio returns increases, risk averse investors require higher expected returns to maintain their level of satisfaction. 
A)  As the standard deviation of portfolio returns increases, risk averse investors require lower expected returns to maintain their level of satisfaction. 
B)  As the returns of a portfolio increase, risk averse investors require the same not more risk. 
C)  As the risk of a portfolio increases with the rate of return, risk averse investors will move to a higher indifference curve. 
D)  As the standard deviation of portfolio returns increases, risk averse investors require higher expected returns to maintain their level of satisfaction.

Question 6

A portfolio with a known one-year rate of return would consist of

Accepted Answer

A)  long-term government bonds. 
B)  options. 
C)  bank C.D.'s. 
D)  corporate bonds. 
A)  long-term government bonds. 
B)  options. 
C)  bank C.D.'s. 
D)  corporate bonds.

Question 7

Portfolio diversification is most effective when the correlation coefficient is

Accepted Answer

A)  greater than zero 
B)  positive 
C)  less than one 
D)  less than zero 
A)  greater than zero 
B)  positive 
C)  less than one 
D)  less than zero

Question 8

According to the nonsatiation assumption in the Markowitz theory, investors always prefer portfolios with the higher levels of terminal wealth because

Accepted Answer

A)  they allow the investor to spend more on future consumption 
B)  the investor will choose the portfolio with the smaller risk 
C)  diminishing marginal utility makes them risk averse 
D)  they allow investors to save more in the present period 
A)  they allow the investor to spend more on future consumption 
B)  the investor will choose the portfolio with the smaller risk 
C)  diminishing marginal utility makes them risk averse 
D)  they allow investors to save more in the present period

Question 9

Studies by cognitive psychologists

Accepted Answer

A)  confirm the efficiency of the market. 
B)  show a tendency for investors to over-react to information. 
C)  find fair security valuation by investors. 
D)  confirm the use of smooth, risk-averse, indifference curves. 
A)  confirm the efficiency of the market. 
B)  show a tendency for investors to over-react to information. 
C)  find fair security valuation by investors. 
D)  confirm the use of smooth, risk-averse, indifference curves.

Question 10

Diminishing marginal utility causes an investor to refuse to accept a fair bet because

Accepted Answer

A)  the investor finds greater and greater satisfaction from each additional dollar earned. 
B)  the investors have a greater opportunity cost than most other investors. 
C)  the satisfaction of gaining a dollar is less than the dissatisfaction of losing a dollar. 
D)  the dissatisfaction of losing a dollar is less than the satisfaction of gaining a dollar. 
A)  the investor finds greater and greater satisfaction from each additional dollar earned. 
B)  the investors have a greater opportunity cost than most other investors. 
C)  the satisfaction of gaining a dollar is less than the dissatisfaction of losing a dollar. 
D)  the dissatisfaction of losing a dollar is less than the satisfaction of gaining a dollar.

Question 11

Marginal utility of wealth will ___ among investors depending upon the level of wealth the investor possesses before receiving the additional dollar in returns.

Accepted Answer

A)  increase 
B)  decrease 
C)  remain constant 
D)  differ 
A)  increase 
B)  decrease 
C)  remain constant 
D)  differ

Question 12

To develop an investor's indifference curves, an analyst

Accepted Answer

A)  must theoretically analyze the personality of the investor. 
B)  can ask the investor for his preference for a series of certain versus risky returns. 
C)  can't do this as it is only a conceptual model. 
D)  is limited to determining the investor's attitude toward risk. 
A)  must theoretically analyze the personality of the investor. 
B)  can ask the investor for his preference for a series of certain versus risky returns. 
C)  can't do this as it is only a conceptual model. 
D)  is limited to determining the investor's attitude toward risk.

Question 13

If an investor's indifference curves intersected, it would imply that

Accepted Answer

A)  the risk averse investor would refuse a fair bet. 
B)  portfolios on two separate indifference curves would be equally desirable to the investor. 
C)  the standard deviation of portfolio returns increases as returns decrease. 
D)  the investor derives less additional satisfaction from each extra dollar earned. 
A)  the risk averse investor would refuse a fair bet. 
B)  portfolios on two separate indifference curves would be equally desirable to the investor. 
C)  the standard deviation of portfolio returns increases as returns decrease. 
D)  the investor derives less additional satisfaction from each extra dollar earned.

Question 14

The "father" of modern portfolio theory is

Accepted Answer

A)  Markowitz. 
B)  Friedman. 
C)  Reich. 
D)  Sharpe. 
A)  Markowitz. 
B)  Friedman. 
C)  Reich. 
D)  Sharpe.

Question 15

What is the variance of a portfolio whose weighting is equally divided between four assets with low correlations and standard deviations of 5%, 15%, 20% and 30%?

Accepted Answer

A)  17.50 
B)  1.75 
C)  .70 
D)  .10 
A)  17.50 
B)  1.75 
C)  .70 
D)  .10

Question 16

The indifference curves for a risk neutral investor are

Accepted Answer

A)  flat. 
B)  steep, positive slope. 
C)  slight, negative slope. 
D)  steep, negative slope. 
A)  flat. 
B)  steep, positive slope. 
C)  slight, negative slope. 
D)  steep, negative slope.

Question 17

A ____ investor will always choose the portfolio with the smaller standard deviation.

Accepted Answer

A)  risk-averse 
B)  risk-seeking 
C)  risk-neutral 
D)  marginal utility 
A)  risk-averse 
B)  risk-seeking 
C)  risk-neutral 
D)  marginal utility

Question 18

A set of convex indifference curves indicates which one of the following about an investor's tradeoff between risk and expected returns?

Accepted Answer

A)  An investor requires an increasingly larger increment of expected return for each additional unit of risk incurred. 
B)  An investor derives less additional satisfaction from each extra dollar earned. 
C)  Portfolios on two separate indifference curves would be equally attractive to the investor. 
D)  Risk averse investors require higher expected returns. 
A)  An investor requires an increasingly larger increment of expected return for each additional unit of risk incurred. 
B)  An investor derives less additional satisfaction from each extra dollar earned. 
C)  Portfolios on two separate indifference curves would be equally attractive to the investor. 
D)  Risk averse investors require higher expected returns.

Question 19

A high risk-averter will have an indifference curve that

Accepted Answer

A)  is relatively flat. 
B)  has a slight, negative slope. 
C)  has a steep, positive slope. 
D)  has a steep, negative slope. 
A)  is relatively flat. 
B)  has a slight, negative slope. 
C)  has a steep, positive slope. 
D)  has a steep, negative slope.

Exam 7: Portfolio Selection Problem

Intel stock declined in value from $34 to $30 and paid a dividend of $1 per share. What is the rate of return on Intel stock?

For an investor's indifference curve

In a variance-covariance matrix of stock returns, the variances of the stock returns appear on the _______ of the matrix.

The probability distribution for a portfolio's returns can be approximated by the familiar bell-shaped curve known as a(n) _________.

Why are the indifference curves of typical investors assumed to slope upward and to the right?

A portfolio with a known one-year rate of return would consist of

Portfolio diversification is most effective when the correlation coefficient is

According to the nonsatiation assumption in the Markowitz theory, investors always prefer portfolios with the higher levels of terminal wealth because

Studies by cognitive psychologists

Diminishing marginal utility causes an investor to refuse to accept a fair bet because

Marginal utility of wealth will ___ among investors depending upon the level of wealth the investor possesses before receiving the additional dollar in returns.

To develop an investor's indifference curves, an analyst

If an investor's indifference curves intersected, it would imply that

The "father" of modern portfolio theory is

What is the variance of a portfolio whose weighting is equally divided between four assets with low correlations and standard deviations of 5%, 15%, 20% and 30%?

The indifference curves for a risk neutral investor are

A ____ investor will always choose the portfolio with the smaller standard deviation.

A set of convex indifference curves indicates which one of the following about an investor's tradeoff between risk and expected returns?

A high risk-averter will have an indifference curve that

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