Chapter # 07

AN ITRODUCTION TO PORTFOLIO MANAGEMENT

1. The optimal portfolio is identified at the point of tangency between theefficient frontier and the a. Highest possible utility curve.

b. Lowest possible utility curve.

c. Middle range utility curve.

d. Steepest utility curve.

2. An individual investor’s utility curves specify the tradeoffs he or she is willing to make between e. High risk and low risk assets.

f. High return and low return assets.

g. Covariance and correlation.

h. Return and risk..

3. As the correlation coefficient between two assets decreases, the shape of the efficient frontier i. Approaches a horizontal straight line.

j. Bends out.

k. Bends in.

l. Approaches a vertical straight line.

4. A positive covariance between two variables indicates that m. The two variables move in different directions.

n. The two variables move in the same direction.

o. The two variables are low risk.

p. The two variables are high risk.

5. A positive relationship between expected return and expected risk is consistent with q. Investors being risk seekers.

r. Investors being risk avoiders.

s. Investors being risk averse.

t. All of the above.

6. What information must you input to a computer program in order to derive theportfolios that make up the efficient frontier u. Expected returns, Covariances and correlations.

v. Standard deviations, variances and Covariances.

w. Expected returns, standard deviations and variances. x. Expected returns, variances and Correlations.

7. The Markowitz model is based on several assumptions regarding investor behavior. Which of the following is an assumption of the Markowitz model? y. Investors consider investment alternative as being represented by a joint probability distribution of expected returns over some holding period. z. Investors minimize one-period expected utility.

{. Investors estimate the risk of the portfolio on the basis of their utility functions. |. Investors base decisions solely on expected return and risk.

8. As the correlation coefficient between two assets increases, the shape of the efficient frontier }. Approaches a horizontal straight line.

~. Bends out.

. Bends in.

. Approaches a vertical straight line.

9. The probability of an adverse outcome is the definition of: . Statistics.

. Variance.

. Random.

. Risk.

10. Which of the following is a measure of risk? . Range of standard deviations

. Expected return

. Standard deviation

. Covariance

11. Semivariance, when applied to portfolio theory, is concerned with the . Square root of deviations from the mean.

. Deviations below the mean.

. Deviations above the mean.

. All deviations (above and below the mean).

12. With low, zero or negative correlations it is possible to derive portfolios that have . Lower risk than the individual securities in the portfolio. . Lower risk than the highest risk individual security in the portfolio. . Higher risk than the individual securities that make up the portfolio. . Higher risk than the highest risk individual security in the portfolio.

13. Given a portfolio of stocks the envelope curve containing the set of best possiblecombinations is known as the . Efficient portfolio.

. Utility curve.

. Efficient frontier.

. Last frontier.

14. Estimation error refers to potential errors that arise from estimating . Expected security returns.

. Standard deviations of expected returns.

. Correlations of expected returns.

. All of the above.

15. A portfolio is considered to be efficient if:

. No other...