Conceptual Questions Portfolio
Management (CFA Prep)
Which of the following asset classes has historically had the highest returns and
standard deviation?
A)Small-cap stocks.
B)Large-cap stocks.
C)Long-term corporate bonds. - Answer A)Small-cap stocks.
A measure of how the returns of two risky assets move in relation to each other is:
A)the range.
B)the covariance.
C)the standard deviation. - Answer B)the covariance.
Which of the following statements about correlation is least accurate?
A)Diversification reduces risk when correlation is less than +1.
B)If the correlation coefficient is 0, a zero variance portfolio can be constructed.
C)The lower the correlation coefficient, the greater the potential benefits from
diversification. - Answer B)If the correlation coefficient is 0, a zero variance portfolio can
be constructed.
Which of the following statements about risk-averse investors is most accurate? A risk-
averse investor:
A)seeks out the investment with minimum risk, while return is not a major consideration.
B)will take additional investment risk if sufficiently compensated for this risk.
C)avoids participating in global equity markets. - Answer B)will take additional
investment risk if sufficiently compensated for this risk.
The capital allocation line is a straight line from the risk-free asset through:
A)the global maximum-return portfolio.
B)the optimal risky portfolio.
C)the global minimum-variance portfolio. - Answer
Which of the following statements about covariance and correlation is least accurate?
A)A zero covariance implies there is no linear relationship between the returns on two
assets.
B)If two assets have perfect negative correlation, the variance of returns for a portfolio
that consists of these two assets will equal zero.
, C)The covariance of a 2-stock portfolio is equal to the correlation coefficient times the
standard deviation of one stock's returns times the standard deviation of the other
stock's returns. - Answer B)If two assets have perfect negative correlation, the variance
of returns for a portfolio that consists of these two assets will equal zero.
What is the risk measure associated with the capital market line (CML)?
A)Beta risk.
B)Unsystematic risk.
C)Total risk. - Answer C)Total risk.
A portfolio to the right of the market portfolio on the CML is:
A)a lending portfolio.
B)a borrowing portfolio.
C)an inefficient portfolio. - Answer B)a borrowing portfolio.
As the number of stocks in a portfolio increases, the portfolio's systematic risk:
A)can increase or decrease.
B)decreases at a decreasing rate.
C)decreases at an increasing rate. - Answer A)can increase or decrease.
Total risk equals:
A)unique plus diversifiable risk.
B)market plus nondiversifiable risk.
C)systematic plus unsystematic risk. - Answer C)systematic plus unsystematic risk.
A return generating model is least likely to be based on a security's exposure to:
A)statistical factors.
B)macroeconomic factors.
C)fundamental factors. - Answer A)statistical factors.
Which of the following statements about the SML and the CML is least accurate?
A)Securities that plot above the SML are undervalued.
B)Investors expect to be compensated for systematic risk.
C)Securities that plot on the SML have no value to investors. - Answer C)Securities that
plot on the SML have no value to investors.
Which of these return metrics is defined as excess return per unit of systematic risk?
A)Sharpe ratio.
B)Jensen's alpha.
Management (CFA Prep)
Which of the following asset classes has historically had the highest returns and
standard deviation?
A)Small-cap stocks.
B)Large-cap stocks.
C)Long-term corporate bonds. - Answer A)Small-cap stocks.
A measure of how the returns of two risky assets move in relation to each other is:
A)the range.
B)the covariance.
C)the standard deviation. - Answer B)the covariance.
Which of the following statements about correlation is least accurate?
A)Diversification reduces risk when correlation is less than +1.
B)If the correlation coefficient is 0, a zero variance portfolio can be constructed.
C)The lower the correlation coefficient, the greater the potential benefits from
diversification. - Answer B)If the correlation coefficient is 0, a zero variance portfolio can
be constructed.
Which of the following statements about risk-averse investors is most accurate? A risk-
averse investor:
A)seeks out the investment with minimum risk, while return is not a major consideration.
B)will take additional investment risk if sufficiently compensated for this risk.
C)avoids participating in global equity markets. - Answer B)will take additional
investment risk if sufficiently compensated for this risk.
The capital allocation line is a straight line from the risk-free asset through:
A)the global maximum-return portfolio.
B)the optimal risky portfolio.
C)the global minimum-variance portfolio. - Answer
Which of the following statements about covariance and correlation is least accurate?
A)A zero covariance implies there is no linear relationship between the returns on two
assets.
B)If two assets have perfect negative correlation, the variance of returns for a portfolio
that consists of these two assets will equal zero.
, C)The covariance of a 2-stock portfolio is equal to the correlation coefficient times the
standard deviation of one stock's returns times the standard deviation of the other
stock's returns. - Answer B)If two assets have perfect negative correlation, the variance
of returns for a portfolio that consists of these two assets will equal zero.
What is the risk measure associated with the capital market line (CML)?
A)Beta risk.
B)Unsystematic risk.
C)Total risk. - Answer C)Total risk.
A portfolio to the right of the market portfolio on the CML is:
A)a lending portfolio.
B)a borrowing portfolio.
C)an inefficient portfolio. - Answer B)a borrowing portfolio.
As the number of stocks in a portfolio increases, the portfolio's systematic risk:
A)can increase or decrease.
B)decreases at a decreasing rate.
C)decreases at an increasing rate. - Answer A)can increase or decrease.
Total risk equals:
A)unique plus diversifiable risk.
B)market plus nondiversifiable risk.
C)systematic plus unsystematic risk. - Answer C)systematic plus unsystematic risk.
A return generating model is least likely to be based on a security's exposure to:
A)statistical factors.
B)macroeconomic factors.
C)fundamental factors. - Answer A)statistical factors.
Which of the following statements about the SML and the CML is least accurate?
A)Securities that plot above the SML are undervalued.
B)Investors expect to be compensated for systematic risk.
C)Securities that plot on the SML have no value to investors. - Answer C)Securities that
plot on the SML have no value to investors.
Which of these return metrics is defined as excess return per unit of systematic risk?
A)Sharpe ratio.
B)Jensen's alpha.
