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10) Investors are rewarded for assuming
A) total risk.
B) diversifiable risk.
C) nondiversifiable risk.
D) any type of risk.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
11) Large, professionally managed portfolios tend to
A) lie on or near the efficient frontier.
B) exhibit very little overlap in their stock holdings.
C) hold many of the same large, well-known companies.
D) be constructed to result in array of portfolio betas allowing investors to choose a position on
the efficient frontier.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
12) Modern portfolio theory does not consider diversifiable risk relevant because
A) it is easy to eliminate.
B) it is impossible to eliminate.
C) its effects are unpredictable.
D) its effects are too small to make a difference in portfolio returns.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
29
13) Explain the differences in how modern and traditional theories of portfolio management
approach the issue of diversification.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
5.6 Learning Goal 6
1) An investment portfolio should be built around the needs of the individual investor.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 6
2) Beta is more useful in explaining an individual security’s return fluctuations than a large
portfolio’s return fluctuations.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
3) A portfolio with a beta of 1.5 will be 50% more volatile than the market portfolio.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
30
4) Both modern portfolio theory and traditional portfolio management result in diversified
portfolios, but they take different approaches to diversification.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
5) Portfolio betas will always be lower than the weighted average betas of the securities in the
portfolio.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
6) Jonathan has the following portfolio of assets.
What is the beta of Jonathan’s portfolio?
A) 1.04
B) 1.11
C) 1.13
D) 1.00
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 6
31
7) Amanda has the following portfolio of assets.
What is the beta of Amanda’s portfolio?
A) 0.62
B) 0.733
C) 1.13
D) 2.20
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
8) A portfolio with a beta of 1.26
A) is 126% more risky than the overall market.
B) has less risk than the lowest risk security held within that portfolio.
C) is 26% more risky than a risk-free asset.
D) is considerably more risky than the overall market.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
9) Which of the following will always lower a portfolio’s beta?
I. Diversify among different types of securities and across industry and geographic lines.
II. Add investments with low betas to the portfolio.
III. Hold more cash or Treasury Bills in the portfolio.
IV. Reduce the percentage of the portfolio invested in high beta securities.
A) I, II and IV only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
32
10) Which of the following guidelines are appropriate for inclusion in a portfolio management
policy?
I. Diversify among different types of securities and across industry and geographic lines.
II. Determine the risk level and financial situation of the individual investor.
III. Utilize beta to help align the portfolio to the risk level of the investor.
IV. Minimize the standard deviation of each security in the portfolio.
A) I, II and IV only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 6
11) Alexis has inherited $120,000 from her grandmother’s estate. She has decided to invest
$10,000 in each of 12 different industries. Because she has lower than average risk tolerance,
she carefully seeks out stocks so that her portfolio will have a weighted average beta of .80.
A) Alexis is using traditional portfolio management techniques.
B) Alexis is using modern portfolio management techniques.
C) Alexis is using a combination of modern and traditional portfolio management techniques.
D) Alexis seems to be unaware of modern portfolio management techniques.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 6
12) Dr. Zweibel’s portfolio consists of four stocks: AZMN, 35%, beta 2.4; MKR, 20%, beta
1.6; ABDE, 25%, beta 1.8; and SBUK, 20%, beta 2.1. Compute Dr. Z’s portfolio beta. Does
he seem to be a conservative or aggressive investor?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
33
13) How can individuals who manage their own portfolios reconcile some of the most useful
aspects of traditional portfolio management and modern portfolio theory?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5