Exam 5: Modern Portfolio Concepts

Which of the following represent unsystematic risks? I. the president of a company suddenly resigns II. the economy goes into a recessionary period III. a company's product is recalled for defects IV. the Federal Reserve unexpectedly changes interest rates

Which of the following statements concerning beta are correct? I. Adding stocks with high betas to a portfolio increases the portfolio's risk. II. The higher the beta, the higher the expected return. III. A beta can be positive, negative, or equal to zero. IV. A beta of .35 indicates a lower rate of risk than a beta of -0.50.

An efficient portfolio maximizes the rate of return without consideration of risk.

The basic theory linking portfolio risk and return is the Capital Asset Pricing Model.

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

Investing globally offers better diversification than investing only domestically.

Which of the following factors comprise the CAPM? I. dividend yield II. risk-free rate of return III. the expected rate of return on the market IV. risk premium for the firm

The CAPM estimates the required rate of return on a stock held as part of a well diversified portfolio.

American depositary shares (ADS) are

Portfolios located on the efficient frontier may not be part of the feasible set.

Historical betas are always reliable predictors of future return fluctuations.

Security A has a beta of .99, security B has a beta of 1.2, and security C has a beta of -1.0. This information indicates that

Explain what beta measures and how investors can use beta.

Which of the following measures or concepts are deliberately used by modern portfolio theory? I. beta II. inter industry diversification III. efficient frontier IV. correlation

Investors are rewarded for assuming

Portfolio objectives should be established independently of tax considerations.

Beta is more useful in explaining an individual security's return fluctuations than a large portfolio's return fluctuations.

Adding stocks with higher standard deviations to a portfolio will necessarily increase the portfolio's risk.

The beta of the market is

How can individuals who manage their own portfolios reconcile some of the most useful aspects of traditional portfolio management and modern portfolio theory?