Question 1

Which of the following is true regarding the Markowitz Model as covered in this chapter?

Accepted Answer

A)  It fully addresses the use of leverage 
B)  Investors must have homogeneous expectations about model parameters 
C)  Investors must be better off if they invest in portfolios to the Northwest of the efficient frontier 
D)  Markowitz diversification is inefficient diversification 
A)  It fully addresses the use of leverage 
B)  Investors must have homogeneous expectations about model parameters 
C)  Investors must be better off if they invest in portfolios to the Northwest of the efficient frontier 
D)  Markowitz diversification is inefficient diversification

Question 2

The optimal portfolio is the efficient portfolio with the

Accepted Answer

A)  lowest risk 
B)  highest risk 
C)  highest utility 
D)  least investment 
A)  lowest risk 
B)  highest risk 
C)  highest utility 
D)  least investment

Question 3

Under the Markowitz model, the risk of a portfolio is measured by the standard deviation of the portfolio return.

Accepted Answer

A) True 
 B)False

Question 4

Markowitz derived the efficient frontier as an upward-sloping straight line.

Accepted Answer

A) True 
 B)False

Question 5

Based on recent history, an investor would probably have a lower risk level with a portfolio consisting of:

Accepted Answer

A)  all stocks 
B)  all bonds 
C)  some stocks and some bonds 
D)  Impossible to tell 
A)  all stocks 
B)  all bonds 
C)  some stocks and some bonds 
D)  Impossible to tell

Question 6

When the Markowitz model assumes that most investors are considered to be "risk averse", this really means that they:

Accepted Answer

A)  will not take a "fair gamble" 
B)  will take a "fair gamble" 
C)  will take a "fair gamble" fifty percent of the time 
D)  will never assume investment risk 
A)  will not take a "fair gamble" 
B)  will take a "fair gamble" 
C)  will take a "fair gamble" fifty percent of the time 
D)  will never assume investment risk

Question 7

Explain what is efficient about the efficient frontier.

Accepted Answer

Any portfolio on the efficient

Question 8

Which of the following is not one of the assumptions of portfolio theory?

Accepted Answer

A)  Liquidity of positions 
B)  Investor preferences are based only on expected return and risk 
C)  Low transactions costs 
D)  A single investment period 
A)  Liquidity of positions 
B)  Investor preferences are based only on expected return and risk 
C)  Low transactions costs 
D)  A single investment period

Question 9

Discuss the importance of the asset allocation decision for portfolio performance.

Accepted Answer

Deciding what percentage of portfolio fu

Question 10

Systematic risk is also called:

Accepted Answer

A)  diversifiable risk 
B)  market risk 
C)  random risk 
D)  company-specific risk 
A)  diversifiable risk 
B)  market risk 
C)  random risk 
D)  company-specific risk

Question 11

A well diversified portfolio will typically consist of a mix of small, mid and large cap stocks, both U.S. and foreign, as well as corporate and U.S. Treasury bonds, real estate and commodities.

Accepted Answer

A) True 
 B)False

Question 12

It would be impossible to combine an asset allocation plan with Markowitz analysis.

Accepted Answer

A) True 
 B)False

Question 13

A portfolio which lies below the efficient frontier is described as

Accepted Answer

A)  optimal 
B)  unattainable 
C)  dominant 
D)  dominated 
A)  optimal 
B)  unattainable 
C)  dominant 
D)  dominated

Question 14

To implement the single-index model, estimates of the _______for each stock are needed.

Accepted Answer

A)  expected return 
B)  standard deviation 
C)  beta 
D)  covariance 
A)  expected return 
B)  standard deviation 
C)  beta 
D)  covariance

Question 15

A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk factors.

Accepted Answer

A) True 
 B)False

Question 16

Asset allocation is one of the most widely used applications of:

Accepted Answer

A)  the Capital Asset Pricing Model. 
B)  random diversification. 
C)  passive portfolio approach. 
D)  modern portfolio theory. 
A)  the Capital Asset Pricing Model. 
B)  random diversification. 
C)  passive portfolio approach. 
D)  modern portfolio theory.

Question 17

Distinguish between systematic and nonsystematic risk. What are two other names for each? Give examples of each.

Accepted Answer

Systematic risk is also called market ri

Question 18

Which of the following is not true regarding the Markowitz theory?

Accepted Answer

A)  Markowitz portfolio theory is considered a three-parameter model 
B)  Under the Markowitz model, no portfolio on the efficient frontier dominates any other portfolio on the efficient frontier 
C)  The Markowitz model is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks 
D)  Markowitz portfolio theory is a multi-period model generates an entire set, or efficient frontier, of portfolios 
A)  Markowitz portfolio theory is considered a three-parameter model 
B)  Under the Markowitz model, no portfolio on the efficient frontier dominates any other portfolio on the efficient frontier 
C)  The Markowitz model is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks 
D)  Markowitz portfolio theory is a multi-period model generates an entire set, or efficient frontier, of portfolios

Question 19

Indifference curves:

Accepted Answer

A)  always curve to the left 
B)  have a positive slope 
C)  cannot intersect 
D)  are convex 
A)  always curve to the left 
B)  have a positive slope 
C)  cannot intersect 
D)  are convex

Question 20

According to Markowitz, an efficient portfolio is one that has the

Accepted Answer

A)  largest expected return for the smallest level of risk 
B)  largest expected return and zero risk 
C)  largest expected return for a given level of risk 
D)  smallest level of risk 
A)  largest expected return for the smallest level of risk 
B)  largest expected return and zero risk 
C)  largest expected return for a given level of risk 
D)  smallest level of risk

Exam 8: Portfolio Selection for All Investors

Which of the following is true regarding the Markowitz Model as covered in this chapter?

The optimal portfolio is the efficient portfolio with the

Under the Markowitz model, the risk of a portfolio is measured by the standard deviation of the portfolio return.

Markowitz derived the efficient frontier as an upward-sloping straight line.

Based on recent history, an investor would probably have a lower risk level with a portfolio consisting of:

When the Markowitz model assumes that most investors are considered to be "risk averse", this really means that they:

Explain what is efficient about the efficient frontier.

Which of the following is not one of the assumptions of portfolio theory?

Discuss the importance of the asset allocation decision for portfolio performance.

Systematic risk is also called:

A well diversified portfolio will typically consist of a mix of small, mid and large cap stocks, both U.S. and foreign, as well as corporate and U.S. Treasury bonds, real estate and commodities.

It would be impossible to combine an asset allocation plan with Markowitz analysis.

A portfolio which lies below the efficient frontier is described as

To implement the single-index model, estimates of the _______for each stock are needed.

A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk factors.

Asset allocation is one of the most widely used applications of:

Distinguish between systematic and nonsystematic risk. What are two other names for each? Give examples of each.

Which of the following is not true regarding the Markowitz theory?

Indifference curves:

According to Markowitz, an efficient portfolio is one that has the

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Indirect Investing: a Global Activity

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All Financial Markets Have Regulations and Trading Practices

Return and Risk: the Foundation of Investing Worldwide

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Asset Pricing Principles

Common Stock Valuation Lessons for All Investors

Managing a Stock Portfolio: a Worldwide Issue

What Happens If Markets Are Efficient or Not?

Economy/ market Analysis Must Be Considered by All Investor

Sector/ industry Analysis

Company Analysis

Technical Analysis

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Managing Bond Portfolios: Some Issues Affect All Investors

Understanding Derivative Securities: Options

Understanding Derivative Securities: Futures

All Investors Must Consider Portfolio Management

Evaluation of Investment Performance: a Global Concept

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