WorksheetsSet 1: Investment and Portfolio Optimization MCQs
Total questions: 24
Worksheet time: 17mins
The Macaulay Duration of a bond measures:
Price sensitivity
Weighted average time to receive cash flows
Coupon effect
Yield-to-maturity
A bond’s duration will be higher when:
Coupon rate is high
Maturity is short
Yield to maturity is low
Coupon frequency is high
Yield to Maturity (YTM) is best defined as:
Current yield
Discount rate equating PV of cash flows to price
Coupon equals market price
Reinvestment rate
The expected return of a portfolio is:
Weighted sum of individual variances
Weighted sum of individual expected returns
Weighted average of betas
None
Portfolio variance depends on:
Individual variances only
Covariance between assets
Weights of assets only
Expected returns
Diversification is most effective when securities are:
Positively correlated
Uncorrelated or negatively correlated
Perfectly correlated
Identical returns
Given, (σX = 5%, σY = 10%, rXY = 0.6). The covariance between Asset X and Asset Y is:
0.006
0.03
0.002
0.05
The standard deviation of a risk-free asset is:
Zero
One
Undefined
The Sharpe ratio uses as a denominator:
Beta
Portfolio standard deviation
Portfolio variance
Covariance
Jensen’s alpha measures:
Total risk-adjusted return
Market performance
Excess return over CAPM prediction
Portfolio variance
If portfolio return = 12%, risk-free = 4%, market return = 10%, and portfolio beta = 1.2, Jensen’s Alpha is:
1.2%
0.8%
1.6%
2.0%
According to Expectations Theory, long-term rates equal:
Average of expected future short-term rates
Current short-term rate
Risk premium
Constant over time
Liquidity Premium Theory suggests investors demand:
Higher yield for short-term bonds
Higher yield for holding long-term bonds
Lower yields for long-term bonds
Same yields for all bonds
Security Market Line (SML) relates expected return to:
Total risk
Market risk (beta)
Unsystematic risk
Standard deviation
If risk-free rate = 5%, market return = 13%, and beta = 1.5, expected return by CAPM is:
15%
16%
17%
18%
Harry Markowitz introduced:
Capital Market Line
Efficient frontier concept
CAPM equation
The efficient frontier shows:
Maximum risk for given return
Minimum risk for given return
Average return portfolios
Risk-free investments only
A two-asset portfolio has 0.6 weight in stock A (return 10%, σ = 12%) and 0.4 in stock B (return 6%, σ = 8%), correlation 0.2. Portfolio return is:
7.0%
8.4%
9.0%
7.8%
A portfolio has return 15%, risk-free 4%, standard deviation 11%. Sharpe ratio = ?
1.0
0.9
1.2
0.8
For a bond with an 8% coupon, face value ₹1000, maturity 5 years, YTM = 10%, price is approximately:
₹950
₹936.3
₹970
₹1000
What is the primary purpose of diversification in a portfolio?
To increase risk
To reduce unsystematic risk
To maximize returns
To ensure liquidity
If a bond has a face value of ₹1000, a coupon rate of 6%, and a YTM of 8%, what is the bond's price approximately?
₹950
₹930
₹970
₹1000
The Capital Asset Pricing Model (CAPM) is used to determine:
Dividend growth rate
Bond pricing
Market volatility
Expected return based on risk
The term structure of interest rates is best described by:
Relationship between interest rates and time to maturity
Only short-term interest rates
Only long-term interest rates
Constant interest rates over time
