Portfolio Efficiency Quiz

A portfolio is considered to be efficient if:

• No other portfolio offers lower risk with the same expected return.

• Choices a and b

• No other portfolio offers higher expected returns with the same risk.

• There is no portfolio with a higher return.

A portfolio manager is considering adding another security to his portfolio. The correlations of the 4 alternatives available are listed below. Which security would enable the highest level of risk diversification?

• Pick a security that is completely unrelated to the existing portfolio securities.

• Select the security with the lowest correlation to existing portfolio securities.

• Select the security with the highest negative correlation

• Choose a security that has a moderate correlation with existing portfolio securities.

          A positive covariance between two variables indicates that

• The two variables fluctuate independently.

• The two variables tend to move in the same direction

• The two variables are unrelated.

• One variable decreases while the other increases.

Which of the following statements is true about the correlation coefficient?

• It is always positive.

• It ranges from -1 to 1.

• It can exceed 1 in some cases.

• It is always negative.

What does a negative covariance between two variables suggest?

• The two variables are independent.

• The two variables tend to move in opposite directions.

• The two variables have no relationship.

• The two variables are perfectly correlated.

In portfolio theory, what is the primary benefit of diversification?

• It increases the expected return of the portfolio.

• It reduces the overall risk of the portfolio.

• It guarantees a positive return.

• It eliminates all risks associated with investments.

Zia owns a stock portfolio invested 25% in stock A, 35% in stock B, 15% in stock C, and 25% in stock D. The betas for the four stocks are 0.9, 1.4, 0.7, and 1.2, respectively. What is the portfolio beta?

• 1.05

• 1.25

• 1.12

• 0.95

True or False

The portfolios on the capital market line are combinations of the risk-free asset and risky portfolio

• True

• False

A statistical measure of the strength of the relationship between the relative movements of two variables

• Variance

• Correlation coefficient

• Regression

• Standard Deviation

An efficient portfolio describes:

• A portfolio that provides the highest return for any given level of risk, while minimizing unsystematic risk.

• A portfolio that has the lowest possible risk, regardless of the return.

• A portfolio that only includes risk-free assets.

• A portfolio that offers the highest return for any given level of risk with the same (or lower) risk or lower risk