Question 1

Owning two securities instead of one will not reduce the risk taken by an investor if the two securities are

Accepted Answer

A)  perfectly positively correlated with each other 
B)  perfectly independent of each other 
C)  perfectly negatively correlated with each other 
D)  of the same category,g. blue chips 
A)  perfectly positively correlated with each other 
B)  perfectly independent of each other 
C)  perfectly negatively correlated with each other 
D)  of the same category,g. blue chips A

Question 2

If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model, the assumption is that past relationships will continue in the future.

Accepted Answer

A) True 
 B)False  True

Question 3

Standard deviations for well-diversified portfolios are reasonably steady over time.

Accepted Answer

A) True 
 B)False  True

Question 4

In a portfolio consisting of two perfectly negatively correlated securities, the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.

Accepted Answer

A) True 
 B)False

Question 5

Given the following probability distribution, calculate the expected return of security XYZ. $\begin{array}{c}
\begin{array}{lll}
 \text {Security XYZ's}\
\underline{\text {Potential return}}\
 20 \% \
 30 \% \
 -40 \% \
50 \% \
10 \%  
\end{array}
\begin{array}{lll}
\
\underline{\text {Probability}}\
0.3 \
0.2 \
0.1 \
0.1 \
0.3 
\end{array}
\end{array}$

Accepted Answer

A)  16 percent 
B)  22 percent 
C)  25 percent 
D) 18 percent 
A)  16 percent 
B)  22 percent 
C)  25 percent 
D) 18 percent

Question 6

A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in

Accepted Answer

A)  both the expected return and the risk of the portfolio 
B)  only the expected return of the portfolio 
C)  only the risk level of the portfolio 
D)  neither the expected return nor the risk level of the portfolio 
A)  both the expected return and the risk of the portfolio 
B)  only the expected return of the portfolio 
C)  only the risk level of the portfolio 
D)  neither the expected return nor the risk level of the portfolio

Question 7

Why is more to put Markowitz diversification into effect than random diversification?

Accepted Answer

It requires more quantitative analysis a

Question 8

Probability distributions:

Accepted Answer

A)  are always discrete. 
B)  are always continuous. 
C)  can be either discrete or continuous. 
D)  are inverse to interest rates. 
A)  are always discrete. 
B)  are always continuous. 
C)  can be either discrete or continuous. 
D)  are inverse to interest rates.

Question 9

Which of the following would be considered a random variable:

Accepted Answer

A)  expected value. 
B)  correlation coefficient between two assets 
C)  one-period rate of return for an asset. 
D)  beta. 
A)  expected value. 
B)  correlation coefficient between two assets 
C)  one-period rate of return for an asset. 
D)  beta.

Question 10

Provide an example of two industries that might have low correlation with one another. Give an example that might exhibit high correlation.

Accepted Answer

Low correlation might be found between l

Question 11

In order to determine the expected return of a portfolio, all of the following must be known, except:

Accepted Answer

A)  probabilities of expected returns of individual assets 
B)  weight of each individual asset to total portfolio value 
C)  expected return of each individual asset 
D)  variance of return of each individual asset and correlation of returns between assets 
A)  probabilities of expected returns of individual assets 
B)  weight of each individual asset to total portfolio value 
C)  expected return of each individual asset 
D)  variance of return of each individual asset and correlation of returns between assets

Question 12

When constructing a portfolio, standard deviations, expected returns, and correlation coefficients are typically calculated from historical data. Why may that be a problem?

Accepted Answer

The problem is that historical patterns

Question 13

Portfolio weights are found by:

Accepted Answer

A)  dividing standard deviation by expected value 
B)  calculating the percentage each asset's value to the total portfolio value 
C)  calculating the return of each asset to total portfolio return 
D)  dividing expected value by the standard deviation 
A)  dividing standard deviation by expected value 
B)  calculating the percentage each asset's value to the total portfolio value 
C)  calculating the return of each asset to total portfolio return 
D)  dividing expected value by the standard deviation

Question 14

A portfolio consisting of two securities with perfect negative correlation in the proper proportions can be shown to have a standard deviation of zero. What makes this riskless portfolio impossible to achieve in the real world?

Accepted Answer

Perfect negative correlation is not achi

Question 15

Markowitz's main contribution to portfolio theory is:

Accepted Answer

A)  that risk is the same for each type of financial asset 
B)  that risk is a function of credit, liquidity and market factors 
C)  risk is not quantifiable 
D)  insight about the relative importance of variance and covariance in determining portfolio risk 
A)  that risk is the same for each type of financial asset 
B)  that risk is a function of credit, liquidity and market factors 
C)  risk is not quantifiable 
D)  insight about the relative importance of variance and covariance in determining portfolio risk

Question 16

The bell-shaped curve, or normal distribution, is considered:

Accepted Answer

A)  discrete. 
B)  downward sloping 
C)  linear 
D)  continuous 
A)  discrete. 
B)  downward sloping 
C)  linear 
D)  continuous

Question 17

The major problem with the Markowitz model is its:

Accepted Answer

A)  lack of accuracy 
B)  predictability flaws 
C)  complexity 
D)  inability to handle large number of inputs 
A)  lack of accuracy 
B)  predictability flaws 
C)  complexity 
D)  inability to handle large number of inputs

Question 18

The expected value is the:

Accepted Answer

A)  inverse of the standard deviation 
B)  correlation between a security's risk and return. 
C)  weighted average of all possible outcomes. 
D)  same as the discrete probability distribution. 
A)  inverse of the standard deviation 
B)  correlation between a security's risk and return. 
C)  weighted average of all possible outcomes. 
D)  same as the discrete probability distribution.

Question 19

The major problem with Markowitz diversification model is that it requires a full set of ________________________ between the returns of all securities being considered in order to calculate portfolio variance.

Accepted Answer

The answer of The major problem with Markowitz diversification model...

Question 20

With a discrete probability distribution:

Accepted Answer

A)  a probability is assigned to each possible outcome 
B)  possible outcomes are constantly changing 
C)  an infinite number of possible outcomes exist 
D)  there is no variance 
A)  a probability is assigned to each possible outcome 
B)  possible outcomes are constantly changing 
C)  an infinite number of possible outcomes exist 
D)  there is no variance

Exam 7: Portfolio Theory Is Universal

Owning two securities instead of one will not reduce the risk taken by an investor if the two securities are

If an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the Markowitz model, the assumption is that past relationships will continue in the future.

Standard deviations for well-diversified portfolios are reasonably steady over time.

In a portfolio consisting of two perfectly negatively correlated securities, the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.

Given the following probability distribution, calculate the expected return of security XYZ. Security XYZ's 20\% 30\% -40\% 50\% 10\% 0.3 0.2 0.1 0.1 0.3

A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in

Why is more to put Markowitz diversification into effect than random diversification?

Probability distributions:

Which of the following would be considered a random variable:

Provide an example of two industries that might have low correlation with one another. Give an example that might exhibit high correlation.

In order to determine the expected return of a portfolio, all of the following must be known, except:

When constructing a portfolio, standard deviations, expected returns, and correlation coefficients are typically calculated from historical data. Why may that be a problem?

Portfolio weights are found by:

A portfolio consisting of two securities with perfect negative correlation in the proper proportions can be shown to have a standard deviation of zero. What makes this riskless portfolio impossible to achieve in the real world?

Markowitz's main contribution to portfolio theory is:

The bell-shaped curve, or normal distribution, is considered:

The major problem with the Markowitz model is its:

The expected value is the:

The major problem with Markowitz diversification model is that it requires a full set of ________________________ between the returns of all securities being considered in order to calculate portfolio variance.

With a discrete probability distribution:

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