Question 1

Portfolios that are not dominated

Accepted Answer

A)   lie on the efficient frontier
B)   are minimum risk portfolios
C)   have maximum expected returns
D)   have low correlations A

Question 2

Most computer output of efficient portfolios lists only the

Accepted Answer

A)   corner portfolios
B)   odd-numbered portfolios
C)   low variance portfolios
D)   maximum return portfolios A

Question 3

Beta is usually calculated using the

Accepted Answer

A)   market model
B)   SML
C)   CML
D)   security variances A

Question 4

The Security Market Line relates expected return to

Accepted Answer

A)   standard deviation
B)   variance
C)   beta
D)   there is no relationship of the SML with expected returns

Question 5

According to the separation theorem, all investors should hold

Accepted Answer

A)   as many securities as possible
B)   as many uncorrelated securities as possible
C)   only the risk-free rate and the market portfolio
D)   only two risky portfolios on the efficient frontier

Question 6

The Security Market Line is a

Accepted Answer

A)   curved line which passes through the risk-free rate and the Market portfolio
B)   straight line which passes through the risk-free rate and the Market portfolio
C)   line which dominates all assets except those on the efficient frontier
D)   line tangent to the efficient frontier

Question 7

Risk averse people only take risks when

Accepted Answer

A)   they believe they will be rewarded for doing so
B)   they have to
C)   it is necessary to guarantee an additional realized return
D)   actual returns are below expected return

Question 8

The value of a negative beta asset is

Accepted Answer

A)   the higher expected return of this asset
B)   the risk reducing properties when added to a portfolio
C)   that it is a necessary component to have a fully diversified portfolio
D)   non-existent because negative beta assets are theoretically impossible

Question 9

The Markowitz algorithm is an application of

Accepted Answer

A)   linear programming
B)   goal programming
C)   integer programming
D)   quadratic programming

Question 10

A security dominates another if

Accepted Answer

A)   it offers the same expected return with less risk
B)   it offers higher expected return for the same risk
C)   both a and b
D)   none of the above

Question 11

Portfolios _____ do not exist.

Accepted Answer

A)   at the far right of the efficient frontier
B)   at the far left of the efficient frontier
C)   above the efficient frontier
D)   below the efficient frontier

Question 12

What is the beta of the risk-free asset?

Accepted Answer

A)   -1.0
B)   -0.5
C)   0
D)   1.0

Question 13

Efficient portfolios to the left of the market portfolio are called

Accepted Answer

A)   borrowing portfolios
B)   fully invested portfolios
C)   dominant portfolios
D)   lending portfolios

Question 14

With the availability of a riskfree rate, the efficient frontier becomes

Accepted Answer

A)   linear
B)   curved
C)   shaped like a letter S
D)   less attractive by moving down and to the right

Question 15

The collection of eligible investments is called the

Accepted Answer

A)   eligible set
B)   efficient set
C)   security universe
D)   principal components

Question 16

The line passing through the risk free rate and the market portfolio is called the

Accepted Answer

A)   market line
B)   optimum combination line
C)   dominant line
D)   unlevered investment line

Exam 6: Why Diversification Is a Good Idea