Deck 6: Why Diversification Is a Good Idea

Question 1

Risk averse people only take risks when

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

Answer 1

they believe they will be rewarded for doing so

Question 2

The collection of eligible investments is called the

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

Answer 2

security universe

Question 3

A security dominates another if

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

Answer 3

both a and b

Question 4

Portfolios that are not dominated

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

Question 5

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

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

Question 6

Portfolios _____ do not exist.

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 7

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

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

Question 8

According to the separation theorem, all investors should hold

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 9

Efficient portfolios to the left of the market portfolio are called

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

Question 10

Most computer output of efficient portfolios lists only the

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

Question 11

The Markowitz algorithm is an application of

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

Question 12

What is the beta of the risk-free asset?

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

Question 13

The value of a negative beta asset is

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 14

The Security Market Line relates expected return to

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

Question 15

The Security Market Line is a

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 16

Beta is usually calculated using the

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