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Apma module 2 Questions and Answers
(100% Correct Answers) Already Graded A+
What is modern portfolio theory (MPT)? Ans: A development by Harry
Markowitz that showed how to derive the expected return and risk for a
portfolio and how to achieve an effective diversification effect
In Harry Markowitz' MPT model, what is the measure for portfolio risk? Ans:
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Standard deviation
What is mean-variance optimization? Ans: The goal of putting together
optimal portfolios that acknowledge not only the importance of return
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and risk but how the various investments perform relative to each other.
It requires looking at the return (mean) and standard deviation
(variance) of each asset, as well as the correlation with every other
asset. These investment portfolios lie on the efficient frontier. When using
this approach, investors are striving to optimize their amount of return
(mean) for any given level of risk (variance, and our measure of risk is
standard deviation). Investors are trying to take only as much risk as
necessary to achieve a given level of return.
What did Markowitz do to make standard deviation a meaningful
measure of portfolio risk? Ans: He relied on a set of assumptions that
implied a theoretical perfect financial market. Investors are trying to
obtain the optimal amount of return they can for the level of risk they are
taking.
What assumptions did Markowitz rely on to make standard deviation a
meaningful measure of portfolio risk? Ans: Investors are risk averse,
investors make investment decisions based on expected return and risk
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only, investors have homogeneous expectations regarding return and
risk for all the investment opportunities available in the market, investors
have a common one-period investment horizon, investors have free
access to all information relevant to investment decision making, there
are no transaction costs, and the capital market is perfectly competitive
Describe the assumption: Investors are risk averse Ans: Investors prefer
higher returns to lower returns given the same level of risk. Likewise,
investors prefer less risk to more risk, given the same level of expected
return.
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Describe the assumption: Investors make investment decisions based on
expected return and risk only Ans: Their utility function (satisfaction level)
is set in the dimension of expected return and risk, with risk being
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measured by standard deviation
Describe the assumption: Investors have homogenous expectations
regarding return and risk for all the investment opportunities available in
the market Ans: The investment opportunity, set in the dimension of risk
and return, is identical for all investors. Thus, an investor's investment
choice depends on his or her indifference curve, which reflects the
risk/return trade-off of that investor
Describe the assumption: Investors have a common one-period
investment horizon Ans: The period can cover any length of time. For
example, it can be as short as a day or as long as a year. An investor
tries to make an optimal investment decision to maximize expected
utility. While investors prefer more wealth to less wealth, the utility
increases at a diminishing rate as wealth increases.
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Describe the assumption: Investors have free access to all information
relevant to investment decision making Ans: Thus, there is no privileged
access to inside information
Describe the assumption: There are no transaction costs Ans: Thus,
commissions, fees, and taxes are nonexistent. Moreover, every
investment is perfectly divisible. Therefore, investors can trades securities
on a fractional basis.
Describe the assumption: The capital market is perfectly competitve Ans:
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As a result, no one is able to manipulate the market
What is the minimum variance frontier? Ans: It traces the outside of all
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the portfolio combinations that an investor could choose from, including
every publicly and non-publicly traded asset around the world; portfolios
outside this cannot exist. Portfolios that lie within this parabola, instead of
the efficient frontier, are inefficient with more risk being taken that should
be for the amount of return achieved (not enough return achieved for
the amount of risk taken).
What is the investment opportunity set? Ans: The set of asset
combinations inside of the minimum variance frontier, which is the set of
all investable portfolios
What is the efficient frontier? Ans: As good as it gets. The top part of the
minimum variance frontier. A risk-averse investor would limit her or his
portfolio choices to that upper boundary of the investment opportunity
set. It provides an investor the highest return at any given level of risk, as
well as the lowest risk at any given level of return. Investors should choose
portfolios along the efficient frontier that are most aligned with their
preferences regarding risk and return.
1
Apma module 2 Questions and Answers
(100% Correct Answers) Already Graded A+
What is modern portfolio theory (MPT)? Ans: A development by Harry
Markowitz that showed how to derive the expected return and risk for a
portfolio and how to achieve an effective diversification effect
In Harry Markowitz' MPT model, what is the measure for portfolio risk? Ans:
© 2026 Assignment Expert
Standard deviation
What is mean-variance optimization? Ans: The goal of putting together
optimal portfolios that acknowledge not only the importance of return
Guru01 - Stuvia
and risk but how the various investments perform relative to each other.
It requires looking at the return (mean) and standard deviation
(variance) of each asset, as well as the correlation with every other
asset. These investment portfolios lie on the efficient frontier. When using
this approach, investors are striving to optimize their amount of return
(mean) for any given level of risk (variance, and our measure of risk is
standard deviation). Investors are trying to take only as much risk as
necessary to achieve a given level of return.
What did Markowitz do to make standard deviation a meaningful
measure of portfolio risk? Ans: He relied on a set of assumptions that
implied a theoretical perfect financial market. Investors are trying to
obtain the optimal amount of return they can for the level of risk they are
taking.
What assumptions did Markowitz rely on to make standard deviation a
meaningful measure of portfolio risk? Ans: Investors are risk averse,
investors make investment decisions based on expected return and risk
,For Expert help and assignment handling,
2
only, investors have homogeneous expectations regarding return and
risk for all the investment opportunities available in the market, investors
have a common one-period investment horizon, investors have free
access to all information relevant to investment decision making, there
are no transaction costs, and the capital market is perfectly competitive
Describe the assumption: Investors are risk averse Ans: Investors prefer
higher returns to lower returns given the same level of risk. Likewise,
investors prefer less risk to more risk, given the same level of expected
return.
© 2026 Assignment Expert
Describe the assumption: Investors make investment decisions based on
expected return and risk only Ans: Their utility function (satisfaction level)
is set in the dimension of expected return and risk, with risk being
Guru01 - Stuvia
measured by standard deviation
Describe the assumption: Investors have homogenous expectations
regarding return and risk for all the investment opportunities available in
the market Ans: The investment opportunity, set in the dimension of risk
and return, is identical for all investors. Thus, an investor's investment
choice depends on his or her indifference curve, which reflects the
risk/return trade-off of that investor
Describe the assumption: Investors have a common one-period
investment horizon Ans: The period can cover any length of time. For
example, it can be as short as a day or as long as a year. An investor
tries to make an optimal investment decision to maximize expected
utility. While investors prefer more wealth to less wealth, the utility
increases at a diminishing rate as wealth increases.
, For Expert help and assignment handling,
3
Describe the assumption: Investors have free access to all information
relevant to investment decision making Ans: Thus, there is no privileged
access to inside information
Describe the assumption: There are no transaction costs Ans: Thus,
commissions, fees, and taxes are nonexistent. Moreover, every
investment is perfectly divisible. Therefore, investors can trades securities
on a fractional basis.
Describe the assumption: The capital market is perfectly competitve Ans:
© 2026 Assignment Expert
As a result, no one is able to manipulate the market
What is the minimum variance frontier? Ans: It traces the outside of all
Guru01 - Stuvia
the portfolio combinations that an investor could choose from, including
every publicly and non-publicly traded asset around the world; portfolios
outside this cannot exist. Portfolios that lie within this parabola, instead of
the efficient frontier, are inefficient with more risk being taken that should
be for the amount of return achieved (not enough return achieved for
the amount of risk taken).
What is the investment opportunity set? Ans: The set of asset
combinations inside of the minimum variance frontier, which is the set of
all investable portfolios
What is the efficient frontier? Ans: As good as it gets. The top part of the
minimum variance frontier. A risk-averse investor would limit her or his
portfolio choices to that upper boundary of the investment opportunity
set. It provides an investor the highest return at any given level of risk, as
well as the lowest risk at any given level of return. Investors should choose
portfolios along the efficient frontier that are most aligned with their
preferences regarding risk and return.
