File: Ch.07, Chapter 7: Portfolio Theory
Multiple Choice Questions
1. With a continuous probability distribution,:
a. a probability is assigned to each possible outcome.
b. possible outcomes are constantly changing.
c. an infinite number of possible outcomes exist.
d. there is no variance.
Ans: c
Difficulty: Moderate
Ref: Dealing With Uncertainty
2. The expected value is the:
a. inverse of the standard deviation
b. correlation between a security’s risk and return.
c. weighted average of all possible outcomes.
d. same as the discrete probability distribution.
Ans: c
Difficulty: Easy
Ref: Dealing With Uncertainty
3. -------------------is concerned with the interrelationships between security returns
as well as the expected returns and variances of those returns.
a. random diversification.
b. correlating diversification
c. Friedman diversification
d. Markowitz diversification
Ans: d
Difficulty: Moderate
Ref: Introduction to Modern Portfolio Theory
4. Which of the following would be considered a random variable:
a. expected value.
b. correlation coefficient between two assets
c. one-period rate of return for an asset.
d. beta.
Ans: c
Difficulty: Easy
Ref: Dealing With Uncertainty
Chapter Seven 82
Portfolio Theory
, 5. Given the following probability distribution, calculate the expected return of
security XYZ.
Security XYZ's
Potential return Probability
20% 0.3
30% 0.2
-40% 0.1
50% 0.1
10% 0.3
a. 16 percent
b. 22 percent
c. 25 percent
d. 18 percent
Ans: b
Difficulty: Moderate
Solution: E(R) = Ripri = (20)(0.3)+ (30)(0.2)+(- 40)(0.1)+(50)(0.1) +(10)(0.3)= 22%.
Ref: Dealing With Uncertainty
6. Probability distributions:
a. are always discrete.
b. are always continuous.
c. can be either discrete or continuous.
d. are inverse to interest rates.
Ans: c
Difficulty: Easy
Ref: Dealing With Uncertainty
7. The bell-shaped curve, or normal distribution, is considered:
a. discrete.
b. downward sloping
c. linear
d. continuous
Ans: d
Difficulty: Easy
Ref: Dealing With Uncertainty
8. Portfolio weights are found by:
a. dividing standard deviation by expected value
b. calculating the percentage each asset’s value to the total portfolio value
c. calculating the return of each asset to total portfolio return
Chapter Seven 83
Portfolio Theory
Multiple Choice Questions
1. With a continuous probability distribution,:
a. a probability is assigned to each possible outcome.
b. possible outcomes are constantly changing.
c. an infinite number of possible outcomes exist.
d. there is no variance.
Ans: c
Difficulty: Moderate
Ref: Dealing With Uncertainty
2. The expected value is the:
a. inverse of the standard deviation
b. correlation between a security’s risk and return.
c. weighted average of all possible outcomes.
d. same as the discrete probability distribution.
Ans: c
Difficulty: Easy
Ref: Dealing With Uncertainty
3. -------------------is concerned with the interrelationships between security returns
as well as the expected returns and variances of those returns.
a. random diversification.
b. correlating diversification
c. Friedman diversification
d. Markowitz diversification
Ans: d
Difficulty: Moderate
Ref: Introduction to Modern Portfolio Theory
4. Which of the following would be considered a random variable:
a. expected value.
b. correlation coefficient between two assets
c. one-period rate of return for an asset.
d. beta.
Ans: c
Difficulty: Easy
Ref: Dealing With Uncertainty
Chapter Seven 82
Portfolio Theory
, 5. Given the following probability distribution, calculate the expected return of
security XYZ.
Security XYZ's
Potential return Probability
20% 0.3
30% 0.2
-40% 0.1
50% 0.1
10% 0.3
a. 16 percent
b. 22 percent
c. 25 percent
d. 18 percent
Ans: b
Difficulty: Moderate
Solution: E(R) = Ripri = (20)(0.3)+ (30)(0.2)+(- 40)(0.1)+(50)(0.1) +(10)(0.3)= 22%.
Ref: Dealing With Uncertainty
6. Probability distributions:
a. are always discrete.
b. are always continuous.
c. can be either discrete or continuous.
d. are inverse to interest rates.
Ans: c
Difficulty: Easy
Ref: Dealing With Uncertainty
7. The bell-shaped curve, or normal distribution, is considered:
a. discrete.
b. downward sloping
c. linear
d. continuous
Ans: d
Difficulty: Easy
Ref: Dealing With Uncertainty
8. Portfolio weights are found by:
a. dividing standard deviation by expected value
b. calculating the percentage each asset’s value to the total portfolio value
c. calculating the return of each asset to total portfolio return
Chapter Seven 83
Portfolio Theory
