Chapter 06 – An Introduction to Portfolio Management
81. Between 1990 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.18 and
0.16, respectively, and the covariance of these index returns was 0.003. What was the correlation coefficient between the
two market indicators?
a.
9.6
b.
0.0187
c.
0.1042
d.
0.0166
e.
0.343
82. Between 1994 and 2004, the standard deviation of the returns for the S&P 500 and the NYSE indexes were 0.27 and
0.14, respectively, and the covariance of these index returns was 0.03. What was the correlation coefficient between the
two market indicators?
a.
1.26
b.
0.7937
c.
0.2142
d.
0.1111
e.
0.44
83. Between 1980 and 1990, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.19 and
0.06, respectively, and the covariance of these index returns was 0.0014. What was the correlation coefficient between the
two market indicators?
a.
8.1428
b.
0.0233
c.
0.0073
d.
0.2514
e.
0.1228
84. Between 1975 and 1985, the standard deviation of the returns for the NYSE and the S&P 500 indexes were 0.06 and
0.07, respectively, and the covariance of these index returns was 0.0008. What was the correlation coefficient between the
two market indicators?
a.
.1525
b.
.1388
c.
.1458
d.
.1622
e.
.1064
85. Between 1986 and 1996, the standard deviation of the returns for the NYSE and the DJIA indexes were 0.10 and 0.09,
respectively, and the covariance of these index returns was 0.0009. What was the correlation coefficient between the two
market indicators?
a.
.1000
b.
.1100
c.
.1258
d.
.1322
Chapter 06 – An Introduction to Portfolio Management
e.
.1164
86. Between 1980 and 2000, the standard deviation of the returns for the NIKKEI and the DJIA indexes were 0.08 and
0.10, respectively, and the covariance of these index returns was 0.0007. What was the correlation coefficient between the
two market indicators?
a.
.0906
b.
.0985
c.
.0796
d.
.0875
e.
.0654
87. Which of the following statements about the correlation coefficient is FALSE?
a.
b.
c.
d.
e.
88. You are given a two-asset portfolio with a fixed correlation coefficient. If the weights of the two assets are varied the
expected portfolio return would be ____ and the expected portfolio standard deviation would be ____.
a.
nonlinear, elliptical
b.
nonlinear, circular
c.
linear, elliptical
d.
linear, circular
e.
circular, elliptical
89. Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the
a.
efficient portfolio.
b.
utility curve.
c.
efficient frontier.
d.
last frontier.
e.
capital asset pricing model.
90. If equal risk is added moving along the envelope curve containing the best possible combinations the return will
a.
decrease at an increasing rate.
b.
decrease at a decreasing rate.
c.
increase at an increasing rate.
d.
increase at a decreasing rate.
e.
remain constant.
91. A portfolio is considered to be efficient if
a.
no other portfolio offers higher expected returns with the same risk.
b.
no other portfolio offers lower risk with the same expected return.
c.
there is no portfolio with a higher return.
d.
it is the risk-minimizing portfolio.
e.
it is the risk-maximizing portfolio.
92. The optimal portfolio is identified at the point of tangency between the efficient frontier and the
a.
highest possible utility curve.
b.
lowest possible utility curve.
c.
middle range utility curve.
d.
steepest utility curve.
e.
flattest utility curve.
93. An individual investor’s utility curves specify the tradeoffs he or she is willing to make between
a.
high risk and low risk assets.
b.
high return and low return assets.
c.
covariance and correlation.
Chapter 06 – An Introduction to Portfolio Management
d.
return and risk.
e.
efficient portfolios.
94. As the correlation coefficient between two assets decreases, the shape of the efficient frontier
a.
approaches a horizontal straight line.
b.
bends out.
c.
bends in.
d.
approaches a vertical straight line.
e.
shifts to the right.
95. A portfolio manager is considering adding another security to his portfolio. The correlations of the five alternatives
available are listed below. Which security would enable the highest level of risk diversification?
a.
0.0
b.
0.25
c.
− 0.25
d.
− 0.75
e.
1.0
96. A positive covariance between two variables indicates that
a.
the two variables move in different directions.
b.
the two variables move in the same direction.
c.
the two variables are low risk.
d.
the two variables are high risk.
e.
the two variables are risk free.
97. The slope of the efficient frontier is calculated as follows
a.
E(Rportfolio)/E(portfolio)
b.
E(portfolio)/ E(Rportfolio)
c.
E(Rportfolio)/E(portfolio)
d.
E(portfolio)/E(Rportfolio)
e.
None of the above
98. The most important criteria when adding new investments to a portfolio is the
a.
expected return of the new investment.
b.
standard deviation of the new investment.
c.
correlation of the new investment with the portfolio.
d.
selection of the risk-free asset.
e.
variance of the risk-free asset.
99. The slope of the utility curves for a strongly risk-averse investor, relative to the slope of the utility curves for a less
risk-averse investor, will
a.
be steeper.
b.
be flatter.
c.
be vertical.
d.
be horizontal.
e.
not change.
100. Which of the following is NOT an assumption of the Capital Market Theory?
a.
All investors are Markowitz efficient investors.
b.
All investors have homogeneous expectations.
c.
There are no taxes or transaction costs in buying or selling assets.
d.
All investments are indivisible, so it is impossible to buy or sell fractional shares.
e.
All investors have the same one period time horizon.
101. The rate of return on a risk-free asset should equal the
a.
long-run real growth rate of the economy.
b.
long-run nominal growth rate of the economy.
c.
short-run real growth rate of the economy.
Chapter 06 – An Introduction to Portfolio Management
d.
short-run nominal growth rate of the economy.
e.
prime rate of interest.
102. What does WRF = – 0.50 mean?
a.
The investor can borrow money at the risk-free rate.
b.
The investor can lend money at the current market rate.
c.
The investor can borrow money at the current market rate.
d.
The investor can borrow money at the prime rate of interest.
e.
The investor can lend money at the prime rate of interest.
103. The market portfolio consists of all
a.
New York Stock Exchange stocks.
b.
high grade stocks and bonds.
c.
stocks and bonds.
d.
U.S. and non-U.S. stocks and bonds.
e.
risky assets.
104. When identifying undervalued and overvalued assets, which of the following statements is FALSE?
a.
An asset is properly valued if its estimated rate of return is equal to its required rate of return.
b.
An asset is considered overvalued if its estimated rate of return is below its required rate of return.
c.
An asset is considered undervalued if its estimated rate of return is above its required rate of return.
d.
An asset is considered overvalued if its required rate of return is below its estimated rate of return.
e.
An asset is considered undervalued if its estimated rate of return is equal to its required rate of return.
105. All of the following questions remain to be answered in the real world EXCEPT
a.
What is a good proxy for the market portfolio?
b.
What happens when you cannot borrow or lend at the risk-free rate?
c.
How good is the capital asset model as a predictor?
d.
What is the beta of the market portfolio of risky assets?
e.
What is the stability of beta for individual stocks?
106. The correlation coefficient between the market return and a risk-free asset would
a.
be +.
b.
be −.
c.
be +1.
d.
be −1.
e.
be zero.
107. The separation theorem divides decisions on ____ from decisions on ____.
a.
lending, borrowing
b.
risk, return
c.
investing, financing
d.
risky assets, risk free assets
e.
buying stocks, buying bonds
108. As the number of securities in a portfolio increases, the amount of systematic risk
a.
remains constant.
b.
decreases.
c.
increases.
d.
changes.
e.
resets to zero.
109. Theoretically, the correlation coefficient between a completely diversified portfolio and the market portfolio should
Chapter 06 – An Introduction to Portfolio Management
be
a.
−1.0.
b.
+1.0.
c.
0.0.
d.
−0.5.
e.
+0.5.
110. All portfolios on the capital market line are
a.
perfectly positively correlated.
b.
perfectly negatively correlated.
c.
unique from each other.
d.
weakly correlated.
e.
unrelated except that they contain the risk-free asset.
111. Which of the following is NOT a relaxation of the assumptions for the CAPM?
a.
differential lending and borrowing rates
b.
a zero-beta model
c.
transaction costs
d.
taxes
e.
homogeneous expectations and fixed planning periods
112. Which of the following would most closely resemble the true market portfolio?
a.
stocks
b.
stocks and bonds
c.
stocks, bonds, and foreign securities
d.
stocks, bonds, foreign securities, and options
e.
stocks, bonds, foreign securities options, and coins
113. A completely diversified portfolio would have a correlation with the market portfolio that is
a.
equal to zero because it has only unsystematic risk.
b.
equal to one because it has only systematic risk.
c.
less than zero because it has only systematic risk.
d.
less than one because it has only unsystematic risk.
e.
less than one because it has only systematic risk.
114. All of the following are assumptions of the Capital Asset Pricing Model (CAPM) EXCEPT
a.
investors can borrow and lend any amount at the risk-free rate.
b.
investors all have homogeneous expectations regarding expected returns.
c.
investors can have different time horizons, daily, weekly, annual, or some other period.
Chapter 06 – An Introduction to Portfolio Management
d.
all investments are infinitely divisible.
e.
capital markets are in equilibrium.