The risk that cannot be diversified away is

The variance of a portfolio of risky securities

C. is the weighted sum of the securities' variances and covariances.

A. is a weighted sum of the securities' variances.

B. is the sum of the securities' variances.

D. is the sum of the securities' covariances.

The standard deviation of a portfolio of risky securities

C. the square root of the weighted sum of the securities' variances and covariances.

A. the square root of the weighted sum of the securities' variances.

B. the square root of the sum of the securities' variances.

D. the square root of the sum of the securities' covariances.

The expected return of a portfolio of risky securities

A. is a weighted average of the securities' returns.

B. is the sum of the securities' returns.

C. is the weighted sum of the securities' variances and covariances.

Other things equal, diversification is most effective when

D. securities' returns are negatively correlated.

A. securities' returns are uncorrelated.

B. securities' returns are positively correlated.

C. securities' returns are high.

The efficient frontier of risky assets is

A. the portion of the investment opportunity set that lies above the global minimum variance portfolio.

B. the portion of the investment opportunity set that represents the highest standard deviations.

C. the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation.

D. the set of portfolios that have zero standard deviation.

The Capital Allocation Line provided by a risk-free security and N risky securities is

C. the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.

A. the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities.

B. the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier.

D. the horizontal line drawn from the risk-free rate.

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum variance portfolio has a standard deviation that is always

C. equal to the sum of the securities' standard deviations.

Which of the following statements is (are) true regarding the variance of a portfolio of two risky securities?

C. The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

A. The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance.

B. There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.

Which of the following statements is (are) false regarding the variance of a portfolio of two risky securities?

A. The higher the coefficient of correlation between securities, the greater the reduction in the portfolio variance.

B. There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.

C. The degree to which the portfolio variance is reduced depends on the degree of correlation between securities.

Efficient portfolios of N risky securities are portfolios that

B. have the highest rates of return for a given level of risk.

A. are formed with the securities that have the highest rates of return regardless of their standard deviations.

C. are selected from those securities with the lowest standard deviations regardless of their returns.

D. have the highest risk and rates of return and the highest standard deviations.

E. have the lowest standard deviations and the lowest rates of return.

Which of the following statement(s) is (are) true regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

A. Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.

B. More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.

C. Investors choose the portfolio that maximizes their expected utility.

Which of the following statement(s) is (are) false regarding the selection of a portfolio from those that lie on the Capital Allocation Line?

A. Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.

B. More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.

C. Investors choose the portfolio that expected utility.

Which of the following portfolio(s) is (are) on the efficient frontier?

C. The portfolio with 26 percent in A and 74 percent in B.

A. The portfolio with 20 percent in A and 80 percent in B.

B. The portfolio with 15 percent in A and 85 percent in B.

D. The portfolio with 10 percent in A and 90 percent in B.

E. A and B are both on the efficient frontier.

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:

A. lend some of her money at the risk-free rate and invest the remainder in the optimal risky portfolio.

B. borrow some money at the risk-free rate and invest in the optimal risky portfolio.

C. invest only in risky securities.

D. such a portfolio cannot be formed.

Portfolio theory as described by Markowitz is most concerned with:

B. the effect of diversification on portfolio risk.

A. the elimination of systematic risk.

C. the identification of unsystematic risk.

D. active portfolio management to enhance returns.

The measure of risk in a Markowitz efficient frontier is:

B. standard deviation of returns.

The unsystematic risk of a specific security

B. results from factors unique to the firm.

A. is likely to be higher in an increasing market.

C. depends on market volatility.

Which statement about portfolio diversification is correct?

D. Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate.

A. Proper diversification can reduce or eliminate systematic risk.

B. The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased.

C. Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return.

E. None of the above statements are correct.

The individual investor's optimal portfolio is designated by:

A. The point of tangency with the indifference curve and the capital allocation line.

B. The point of highest reward to variability ratio in the opportunity set.

C. The point of tangency with the opportunity set and the capital allocation line.

D. The point of the highest reward to variability ratio in the indifference curve.

In a two-security minimum variance portfolio where the correlation between securities is greater than -1.0

B. the security with the higher standard deviation will be weighted less heavily.

A. the security with the higher standard deviation will be weighted more heavily.

C. the two securities will be equally weighted.

When two risky securities that are positively correlated but not perfectly correlated are held in a portfolio,

B. the portfolio standard deviation will be less than the weighted average of the individual security standard deviations.

A. the portfolio standard deviation will be greater than the weighted average of the individual security standard deviations.

C. the portfolio standard deviation will be equal to the weighted average of the individual security standard deviations.

D. the portfolio standard deviation will always be equal to the securities' covariance.

As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation?

D. It decreases at a decreasing rate.

A. It increases at an increasing rate.

B. It increases at a decreasing rate.

C. It decreases at an increasing rate.

E. It first decreases, then starts to increase as more securities are added.

In words, the covariance considers the probability of each scenario happening and the interaction between

B. securities' returns relative to their mean returns.

A. securities' returns relative to their variances.

C. securities' returns relative to other securities' returns.

D. the level of return a security has in that scenario and the overall portfolio return.

E. the variance of the security's return in that scenario and the overall portfolio variance.

The standard deviation of a two-asset portfolio is a linear function of the assets' weights when

D. the assets have a correlation coefficient equal to one.

A. the assets have a correlation coefficient less than zero.

B. the assets have a correlation coefficient equal to zero.

C. the assets have a correlation coefficient greater than zero.

E. the assets have a correlation coefficient less than one.

A two-asset portfolio with a standard deviation of zero can be formed when

E. the assets have a correlation coefficient equal to negative one.

A. the assets have a correlation coefficient less than zero.

B. the assets have a correlation coefficient equal to zero.

C. the assets have a correlation coefficient greater than zero.

D. the assets have a correlation coefficient equal to one.

The separation property refers to the conclusion that

A. the determination of the best risky portfolio is objective and the choice of the best complete portfolio is subjective.

B. the choice of the best complete portfolio is objective and the determination of the best risky portfolio is objective.

C. the choice of inputs to be used to determine the efficient frontier is objective and the choice of the best CAL is subjective.

D. the determination of the best CAL is objective and the choice of the inputs to be used to determine the efficient frontier is subjective.

E. investors are separate beings and will therefore have different preferences regarding the risk-return tradeoff.

ipm 07

Authored by Annette Malfoy

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ipm 07

market risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Systematic risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Nondiversifiable risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Diversifiable risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Unique risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Firm-specific risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Non-systematic risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

The risk that can be diversified away is

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

The risk that cannot be diversified away is

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

The variance of a portfolio of risky securities

The variance of a portfolio of risky securities is a weighted sum taking into account both the variance of
the individual securities and the covariances between securities.

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ipm 07

market risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Systematic risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Nondiversifiable risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Diversifiable risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Unique risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Firm-specific risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

Non-systematic risk is also referred to as

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

The risk that can be diversified away is

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

The risk that cannot be diversified away is

Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firm-specific risks are synonyms referring to the risk that can be eliminated from the portfolio by diversification.

The variance of a portfolio of risky securities

The variance of a portfolio of risky securities is a weighted sum taking into account both the variance ofthe individual securities and the covariances between securities.

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The variance of a portfolio of risky securities is a weighted sum taking into account both the variance of
the individual securities and the covariances between securities.