Self Test Portfolio Management

6 questions: 9 minutes

1. Differences in average portfolio allocations to equities across countries are least likely a result of:

A. availability of equities.

B. differences in historical inflation.

C. different historical attitudes toward financial risk.

2. Based on studies showing that differences in target asset allocations explain as much as 90% of the variation in a portfolio's returns over time, it is most likely that:

A. market timing with respect to asset class exposure has not greatly improved returns.

B. target asset allocations should match the weights of asset classes in the market as a whole.

C. on average, managers are better at selecting asset class allocations than selecting stocks.

3. According to the Capital Asset Pricing Model:

A. an investor who is risk averse should hold at least some of the risk-free asset in his portfolio.

B. a stock with high risk, measured as standard deviation of returns, will have high expected returns.

C. any investor who takes on risk will hold some of the market portfolio.

4. Beta is best described as the:

A. slope of the Security Market Line.

B. correlation of returns with those of the market portfolio.

C. covariance of returns with the market portfolio in terms of its variance of returns.

5. According to Markowitz portfolio theory:

A. combining any two risky assets in a portfolio will reduce unsystematic risk compared to a portfolio holding only one of the two risky assets.

B. adding a risky stock to a (less risky) bond portfolio can decrease portfolio risk.

C. when there is no risk-free asset, choosing any portfolio on the efficient frontier will minimize portfolio risk.

An analyst has determined that the expected returns for an asset, conditional on the performance of the overall economy, are:

Return

Probability

Economic Growth

5%

20%

Poor

10%

40%

Average

14%

40%

Good

The conditional expected

returns on the market

Return

Probability

Economic Growth

2%

20%

Poor

10%

40%

Average

15%

40%

Good

If the risk-free rate is 5% and the risky asset has a beta of 1.1, with respect to the market portfolio, the analyst should:

A. sell (or sell short) the risky asset because its expected return is less than equilibrium expected return on the market portfolio.

B. buy the risky asset because the analyst expects the return on it to be higher than its required return in equilibrium.

C. sell (or sell short) the risky asset because its expected return is not sufficient to compensate for its market risk.

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