1. Combining two securities in a portfolio will reduce risk of that portfolio only if :
A) These two securities are perfectly correlated ( correlation equals to +1)
B) These two securities are not perfectly correlated (correlation is less than +1)
C) Their Sharpe ratio is not the same
D) They have the same average return but different risk
E) They have same risk but different average return
2. Beta was developed as a measure of risk in order to capture securities:
A) Firm-specific risk
B) Diversifiable risk
C) Market risk
D) Unique risk
3. Interpret the following statement in the content of portfolio management , “Portfolio management primarily involves reducing risk with certain returns objectives”
A) It is false, because portfolio manager should concentrate on maximizing returns and portfolio risk will be reduced automatically.
B) It is false, because lower risk implies lower return and investors do not want to have lower return.
C) It is true, because all investors are risk averse and that means investors always want to reduce risk regardless of the return.
D) It is true, because lower dispersion of the returns otherwise equivalent investments would lead to a higher dollar value of the portfolio.
4. If you construct a well-diversified portfolio, its beta will be reduced below the value of any individual security’s beta:
A) It is true, because beta reduction is a benefit of diversification
B) It is true only for high beta securities
C) 0It is not true, because portfolio beta is weighted average of individual beta
D) It is not true only for the stocks with high firm specific risk
5. The term “seeking alpha” most likely refers to
A) Running regressions to find intercept
B) Calculating information ratios to be used in determining optimal allocation of funds between the securities in the portfolio
C) Finding anti- betas
D) Looking for undervalued securities that will generate positive alphas for the level of risk they have
6. As compared to CAPM, what can you say about Markowitz Portfolio theory ?
A) It explicitly excludes firm specific
B) It explicitly excludes market risk
C )It implicitly includes only risk neutral investors
D) It implicitly includes both market and firm specific risk
E) It implicitly assumes that market portfolio is the optimal risky portfolio
7. If you have a well diversified portfolio for over 50 stocks, you should look at
A) Beta as your measure of risk
B) Standard deviation as your measure of risk
C) Market portfolio as your benchmark
D) Sharpe ratio as your main risk measure