TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 8
RISK AND RETURN THEORIES: I
MULTIPLE CHOICE
1. Portfolio theory deals with:
[M]
2. Together, portfolio and capital market theories provide a framework to:
[M]
3. The ratio of the gain on an investment, which arises either from a change in the
investment’s value or a cash distribution, to the initial value of the investment is known
as the:
[E]
4. The investment return can be measured in terms of:
5. To construct an efficient portfolio of risky assets, it is assumed that investors are:
[E]
6. In constructing a portfolio of assets, investors seek to maximize the expected return from
[M]
7. When the return to be realized in the future is known with certainty today, the asset is
said to be:
[E]
8. Even securities issued by the U.S. government are risky assets, because:
[D]
9. The risk of a portfolio can be quantified by:
10. Historical return distributions for a portfolio of a large number of securities have shown
that the distribution is:
11. Systematic risk is:
[D]
12. The total risk of a portfolio consists of:
[M]
13. Diversification reduces the variability of returns if the correlation among security returns
is:
[M]
14. The standard deviation of portfolio return is a measure of:
15. Studies of common stock returns have shown that total portfolio risk declines:
16. Market risk is:
[D]
17. In constructing Markowitz efficient portfolios it is assumed that:
[M]
18. The highest expected return for all feasible portfolios with the same risk is called:
[M]
19. The lower the correlation between assets:
[D]
20. Graphically, all the Markowitz efficient portfolios lie:
52
TRUE/FALSE
1. The development of the theoretical relationship between risk and expected return is built
on the portfolio theory and capital market theory.
[E]
2. The arithmetic average can be thought of the mean value of the withdrawals that can be
made at the end of each interval while maintaining the initial portfolio value intact.
[M]
3. The standard deviation is defined as the square root of the correlation coefficient.
[M]
4. It has been observed that security prices follow a random walk.
[M]
5. On the average, approximately 40% of the single-security risk is eliminated by forming
randomly selected portfolios of 5 stocks.
ESSAY QUESTIONS
1. Discuss the impact of diversification on total risk.
Key Issues:
2. Explain the differences and similarities between the portfolio theory and capital market
theory.
Key Issues:
3. Explain what is meant by an optimal portfolio and how an optimal portfolio is selected
from all the portfolios available on the Markowitz efficient frontier.
Key Issues: