Question 1

An indifference curve shows:
A) the one most desirable portfolio for a particular investor
B) all combinations of portfolios that are equally desirable to a particular investor
C) all combinations of portfolios that are equally desirable to all investors
D) the one most desirable portfolio for all investors

Accepted Answer

Indifference curve shows all the combinations of portfolios that are equally desirable to a particular investor. It does not represent a single portfolio, but rather a set of portfolios that provide the same level of satisfaction or utility to the investor. Therefore, option B is the correct answer. Option A and D both miss the concept of "indifference curve" and Option C is incorrect as it is not possible for all investors to have the same preferences when it comes to investments.

Question 2

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

Accepted Answer

A

Question 3

Which of the following statements regarding indifference curves is not true?
A) Investors have a finite number of indifference curves
B) The greater the slope of the indifference curve, the greater the risk aversion of investors
C) The indifference curves for all risk-averse investors will be upward sloping
D) Indifference curves cannot intersect

Accepted Answer

Indifference curves do not have a finite number. There can be an infinite number of indifference curves, each representing different combinations of risk and return that yield the same level of satisfaction or utility for the investor.

Question 4

A portfolio which lies below the efficient frontier is described as
A) optimal
B) unattainable
C) dominant
D) dominated

Accepted Answer

A portfolio which lies below the efficient frontier is considered dominated, as there exists another portfolio with a higher return for the same level of risk. Therefore, it is suboptimal to choose such a portfolio.

Question 5

The single index model divides a security's return into _______ and ________ parts.
A) supply; demand
B) control; non-control
C) company-related; industry-related
D) micro; macro

Accepted Answer

The answer of The single index model divides a security's...

Question 6

Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by
A) aggressive investors
B) conservative investors
C) risk-averse investors
D) defensive investors

Accepted Answer

Portfolios lying on the upper right portion of the efficient frontier have higher expected returns and higher levels of risk. Aggressive investors typically have a higher tolerance for risk and are willing to take on higher levels of risk in order to achieve higher returns, making them more likely to choose portfolios in this area of the efficient frontier.

Question 7

The optimal portfolio is the efficient portfolio with the
A) lowest risk
B) highest risk
C) highest utility
D) least investment

Accepted Answer

The optimal portfolio is the efficient portfolio that provides the highest utility to the investor. It balances expected return and risk to provide the highest level of satisfaction to the investor. Therefore, option C, highest utility, is the best answer. Options A and B are incorrect because risk alone is not the sole determinant of an optimal portfolio. Option D is also incorrect as the level of investment is dependent on the investor's individual preferences and constraints.

Question 8

The benefits of international diversification have ________since 1995.
A) increased
B) decreased
C) disappeared
D) become more volatile

Accepted Answer

Since 1995, the world has become more globalized and interconnected, leading to greater comovement among international markets. As a result, the benefits of international diversification have decreased, as diversifying across countries no longer provides as much risk reduction as it once did.

Question 9

Which of the following is not one of the assumptions of portfolio theory?
A) Liquidity of positions
B) Investor preferences are based only on expected return and risk
C) Low transactions costs
D) A single investment period

Accepted Answer

Portfolio theory assumes multiple investment periods, not a single investment period.

Question 10

Under the Markowitz model, investors:
A) are assumed to be risk-seekers
B) are not allowed to use leverage
C) are assumed to be institutional investors
D) are always better off if they select portfolios consisting of multiple securities

Accepted Answer

The answer of Under the Markowitz model, investors:
A) are assumed...

Question 11

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

Accepted Answer

Indifference curves are generally considered to be convex, which means that they curve inward towards the origin. This reflects the concept of diminishing marginal utility, which suggests that as more of one good is consumed, the marginal utility of that good decreases. As a result, consumers will need increasing amounts of other goods to maintain the same level of satisfaction. Indifference curves cannot intersect, as this would violate the transitivity of preferences.

Question 12

Indifference curves reflect -------------- while the efficient set of portfolios represent ---------------.
A) portfolio possibilities; investor preferences.
B) investor preferences; portfolio possibilities.
C) portfolio return; investor risk.
D) investor preferences; portfolio return.

Accepted Answer

Indifference curves represent the investor's preferences for combinations of risk and return, while the efficient set of portfolios represents the different combinations of risk and return that are possible given the available investment opportunities. Therefore, option B correctly matches indifference curves with investor preferences and the efficient set of portfolios with portfolio possibilities.

Question 13

Choose the portfolio from the following set that is not on the efficient frontier.
A) A: expected return of 10 percent; standard deviation of 8 percent
B) B: expected return of 18 percent; standard deviation of 13 percent
C) C: expected return of 38 percent; standard deviation of 38 percent
D) D: expected return of 15 percent; standard deviation of 14 percent

Accepted Answer

The answer of Choose the portfolio from the following set...

Question 14

The optimal portfolio for a risk-averse investor:
A) cannot be determined
B) occurs at the point of tangency between the highest indifference curve and the highest expected return
C) occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios
D) occurs at the point of tangency between the highest expected return and lowest risk efficient portfolios

Accepted Answer

The optimal portfolio for a risk-averse investor occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios, as this is considered the optimal combination of risk and return. The efficient set of portfolios is determined by the combination of assets that provides the highest expected return for a given level of risk. Indifference curves represent the investor's preferences for risk and return, with higher curves indicating a higher level of satisfaction. Therefore, the optimal portfolio will be the one that offers the highest level of satisfaction (indicated by the highest indifference curve) while also being on the efficient set of portfolios to minimize risk.

Question 15

As a measure of market risk, the beta for the S&P 500 is generally considered to be:
A) -1.0
B) 1.0
C) 0
D) impossible to determine

Accepted Answer

The beta for the S&P 500 is generally considered to be 1.0, which represents the market average. A beta of -1.0 would mean that the stock moves in the opposite direction of the market and a beta of 0 would mean that the stock does not move with the market at all. It is possible to determine the beta for the S&P 500 through statistical analysis.

Question 16

Different investors will estimate the inputs to the Markowitz model differently because:
A) every investor has his/her own risk/return preferences
B) every investor has access to different information about securities
C) there is an inherent uncertainty in security analysis
D) there is a random selection process used by individual investors

Accepted Answer

The answer of Different investors will estimate the inputs to...

Question 17

According to Markowitz, rational investors will seek efficient portfolios because these portfolios are optimal based on:
A) expected return.
B) risk.
C) expected return and risk.
D) transactions costs.

Accepted Answer

Markowitz's theory of portfolio selection suggests that rational investors seek efficient portfolios, which are those portfolios that offer the highest expected return for a given level of risk, or the lowest risk for a given level of expected return. Therefore, efficient portfolios are optimal based on both expected return and risk. Transactions costs are not a determining factor in the selection of efficient portfolios.

Question 18

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

Accepted Answer

The answer of Which of the following is true regarding...

Question 19

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

Accepted Answer

"Risk averse" means that investors are not willing to take on risk unless they are compensated with a higher expected return. Therefore, they will not take a "fair gamble" if it means risking their investment without a higher expected return.

Question 20

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

Accepted Answer

Markowitz's theory states that an efficient portfolio is one that maximizes the expected return for a given level of risk. It is not simply about maximizing returns or minimizing risk, but finding the right balance between the two. The goal is to achieve the highest possible returns for the amount of risk that an investor is willing to take on. Therefore, choice C is the correct answer.

Quiz 8: Portfolio Selection for All Investors

An indifference curve shows:

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

Which of the following statements regarding indifference curves is not true?

A portfolio which lies below the efficient frontier is described as

The single index model divides a security's return into _ and __ parts.

Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by

The optimal portfolio is the efficient portfolio with the

The benefits of international diversification have ________since 1995.

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

Under the Markowitz model, investors:

Indifference curves:

Indifference curves reflect -------------- while the efficient set of portfolios represent ---------------.

Choose the portfolio from the following set that is not on the efficient frontier.

The optimal portfolio for a risk-averse investor:

As a measure of market risk, the beta for the S&P 500 is generally considered to be:

Different investors will estimate the inputs to the Markowitz model differently because:

According to Markowitz, rational investors will seek efficient portfolios because these portfolios are optimal based on:

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

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

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