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Multiple Choice Quiz
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1
The standard deviation of a two-asset portfolio is a linear function of the assets' weights when
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.
E)the assets have a correlation coefficient less than one.
2
Which statement about portfolio diversification is correct?
A)Proper diversification can 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.
D)Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate.
E)None of the above statements are correct.
3
All things equal, diversification is most effective when
A)securities' returns are positively correlated.
B)securities' returns are uncorrelated.
C)securities' returns are high.
D)securities' returns are negatively correlated.
E)A and C
4
When an investment opportunity set is 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
5
Efficient portfolios of N risky securities are portfolios that
A)are formed with the securities that have the highest rates of return regardless of their standard deviations.
B)have the highest rates of return and the highest standard deviations.
C)are selected from those 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
6
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)such a portfolio cannot be formed.
D)invest only in risky securities.
E)B and D
7
Portfolio theory as described by Markowitz is most concerned with
A)the elimination of systematic risk.
B)the addition of unsystematic risk.
C)the effect of diversification on portfolio risk.
D)active portfolio management to enhance returns.
E)none of the above
8
A statistic that measures how the returns of two risky assets move together is
A)correlation.
B)standard deviation.
C)covariance.
D)variance.
E)A and C
9
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
10
Security C has expected return of 12% and standard deviation of 20%. Security D has expected return of 15% and standard deviation of 27%. If the two securities have a correlation coefficient of 0.7, what is their covariance?
A)0.038
B)0.070
C)0.018
D)0.013
E)0.054





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