QUIZZ2 - COP

According to portfolio theory, how can overall portfolio risk be reduced?

• By investing only in high-risk assets

• By holding assets with low or negative correlations

• By focusing on one asset class

• By avoiding all investments in volatile markets

What does diversification aim to achieve in a portfolio?

• Eliminate systematic risk entirely

• Increase individual asset returns

• Reduce unsystematic risk without sacrificing expected returns

• Focus investments on one high-performing sector

What does the term "optimal portfolio" refer to in Markowitz Portfolio Theory

• A portfolio with only high-return assets

• A portfolio that eliminates all forms of risk

• A portfolio that has the highest number of assets

• A portfolio that lies on the Efficient Frontier and matches the investor’s risk tolerance

Which type of risk can diversification reduce according to Markowitz Portfolio Theory?

• Systematic risk

• Inflation risk

• Unsystematic risk

• Market risk

What does a negative correlation between two assets imply

• The assets move in opposite directions in terms of returns

• The assets have identical returns over time

• The assets move in similar directions in terms of returns

• The assets have no relationship in their returns

What happens to the shape of the Efficient Frontier if all assets in a portfolio are perfectly correlated?

• It becomes a flat horizontal line

• It becomes a straight line

• It remains a curve but shifts upward

• It disappears entirely

In Markowitz Portfolio Theory, what is the role of covariance between asset returns

• It measures individual asset volatility

• It identifies how two asset returns move together and affects portfolio diversification benefits

• It calculates expected portfolio returns directly

• It determines asset prices

What does the Capital Allocation Line (CAL) represent in relation to Markowitz Portfolio Theory?

• The relationship between systematic and unsystematic risk

• The correlation between individual asset returns within a portfolio

• The trade-off between expected return and total portfolio risk when including a risk-free asset

• The historical performance of portfolios over time

What does beta represent in the CAPM model?

• The total risk of an asset

• The unsystematic risk of an asset

• The volatility of an asset relative to the market

• The dividend payout ratio

Which type of risk does CAPM account for

• Systematic risk only

• Unsystematic risk only

• Both systematic and unsystematic risks

• Diversifiable risk