Question 1

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

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Question 2

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.

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Question 3

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?

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Question 4

The number of covariances in the Markowitz model is ________ ; the number of unique covariances is [n (n-1)]/2.

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Question 5

An efficiently diversified portfolio still has _____________________ risk.

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Question 6

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.

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In a perfectly negatively correlated portfolio, the returns of one security will move in the opposite direction of the other security. Therefore, if one security has the highest expected return, the other security will have the lowest expected return. By holding 100% of the asset with the highest expected return, the portfolio will have the highest attainable expected return.

Question 7

Markowitz diversification, also called _____________ diversification, removes _________________ risk from the portfolio.

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Question 8

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

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Question 9

Conventional wisdom has long held that diversification of a stock portfolio should be across industries. Does the correlation coefficient indirectly recommend the same thing?

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Question 10

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

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Question 11

How is the correlation coefficient important in choosing among securities for a portfolio?

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Question 12

Why was the Markowitz model impractical for commercial use when it was first introduced in 1952? What has changed by the 1990s?

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Question 13

Are the expected returns and standard deviation of a portfolio both weighted averages of the individual securities expected returns and standard deviations? If not, what other factors are required?

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Quiz 7: Portfolio Theory Is Universal