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Investments 4/c/e
Investments, 4th Canadian Edition, 4/e
Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Portfolio Selection

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


The change from a straight to a kinked capital allocation line is a result of:
A)borrowing rate exceeding lending rate.
B)reward-to-volatility ratio increasing.
C)an investor's risk tolerance decreasing.
D)increase in the portfolio proportion of the risk-free asset.
E)none of the above.

The first major step in asset allocation is:
A)estimating security betas.
B)analyzing financial statements.
C)assessing risk tolerance.
D)identifying market anomalies.
E)none of the above.

Passive investing
A)involves considerable security selection.
B)may be accomplished by investing in index mutual funds.
C)involves considerable transaction costs.
D)all of the above.
E)none of the above.

In the mean-standard deviation graph, the line that connects the optimal risky portfolio, P, and the risk free rate is called
A)the Security Market Line
B)the investor's utility line
C)the Indifference Curve
D)the Capital Allocation Line
E)none of the above

When wealth is shifted from the risky portfolio to the risk-free asset, what happens to the relative proportions of the various risky assets within the risky portfolio?
A)They are not changed
B)Some increase and some decrease.
C)They all increase.
D)They all decrease.
E)The answer depends on the specific circumstances.

Given the capital allocation line, an investor's optimal portfolio is the portfolio that
A)maximizes her expected utility.
B)maximizes her risk.
C)minimizes both her risk and return.
D)maximizes her expected profit.
E)none of the above.

The risk that can be diversified away is
A)systematic risk.
C)firm specific risk.
D)market risk.
E)none of the above.

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
A)equal to zero.
B)greater than zero.
C)equal to the sum of the securities' standard deviations.
D)equal to -1.
E)none of the above.

Efficient portfolios of N risky securities are portfolios that
A)are formed with securities offering highest returns regardless of their standard deviations.
B)have the highest risk and rates of return and the highest standard deviations.
C)are selected from securities with the lowest standard deviations regardless of their returns.
D)have the highest rates of return for a given level of risk.
E)none of the above

The individual investor's optimal portfolio is designated by:
A)The point of tangency with the opportunity set 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 indifference curve and the capital allocation line.
D)The point of the highest reward to variability ratio in the indifference curve.
E)None of the above.