MCQ Quiz

Question 1 of 35

An investor who chooses a guaranteed outcome of EUR 50 over a gamble with an expected value of EUR 50 is most likely classified as:

Risk seeking
Risk neutral
Risk averse

Question 2 of 35

Two stocks each have a standard deviation of 20% and equal weights of 50%. If their correlation is -1, the portfolio standard deviation is closest to:

0%
14%
20%

Question 3 of 35

The slope of the capital allocation line is most accurately referred to as the:

Risk-free rate
Market price of risk
Portfolio variance

Question 4 of 35

A risk-free asset most likely generates the same utility for:

Only risk-averse investors
Only risk-neutral investors
All investors regardless of risk preference

Question 5 of 35

Compared to the correlation coefficient, the covariance between two assets is most likely:

Easier to interpret because it is bounded
More difficult to interpret because it is unbounded
Always positive

Question 6 of 35

Among major US asset classes over the period 1926-2017, which asset class most likely had the highest annualized return?

Long-term corporate bonds
Small company stocks
Treasury bills

Question 7 of 35

In the utility function $U = E(r) - \frac{1}{2}A\sigma^2$, for a risk-averse investor the value of A is most likely:

Negative
Zero
Positive

Question 8 of 35

The correlation coefficient between two assets is most likely bounded between:

0 and +1
-1 and +1
-infinity and +infinity

Question 9 of 35

Which of the following is least likely a component of trading costs that affects investment decisions?

Brokerage commission
Dividend yield
Bid-ask spread

Question 10 of 35

On the efficient frontier, as an investor moves from left to right, the incremental return for each additional unit of risk most likely:

Increases
Decreases
Remains constant

Question 11 of 35

The standard deviation of a portfolio of risky assets is most likely equal to the weighted average of the individual assets' standard deviations when the correlation between all assets is:

-1
0
+1

Question 12 of 35

Risk tolerance is most accurately described as being:

Positively related to risk aversion
Negatively related to risk aversion
Unrelated to risk aversion

Question 13 of 35

An investor's optimal portfolio is most likely found at the point where:

The indifference curve is tangent to the capital allocation line
The capital allocation line intersects the efficient frontier at two points
The indifference curve crosses the capital allocation line at two points

Question 14 of 35

A correlation above 0.90 between two assets is most accurately described as providing:

No opportunity for diversification
Limited opportunity for diversification
Significant opportunity for diversification

Question 15 of 35

An investment return distribution that has a higher probability of extreme returns than a normal distribution most likely exhibits:

Positive skewness
Kurtosis (fat tails)
Negative mean return

Question 16 of 35

Which of the following US asset classes most likely had the lowest risk (standard deviation) over the period 1926-2017?

Large company stocks
Long-term government bonds
Treasury bills

Question 17 of 35

Two stocks each have a standard deviation of 20% and equal portfolio weights of 50%. If their correlation is 0, the portfolio standard deviation is closest to:

10%
14%
20%

Question 18 of 35

Diversification most likely reduces portfolio risk when the correlation between assets is:

Equal to +1
Less than +1
Equal to 0 only

Question 19 of 35

According to the two-fund separation theorem, all investors will most likely hold a combination of:

Two risky portfolios
A risk-free asset and the optimal risky portfolio
A risk-free asset and the global minimum-variance portfolio

Question 20 of 35

Investing in one's own employer's stock is least likely a good diversification strategy because:

It concentrates both human capital and financial capital in one entity
Employer stock always has negative expected returns
Employer stock is perfectly correlated with the risk-free asset

Question 21 of 35

The capital allocation line (CAL) is most accurately described as the line that represents:

All portfolios that combine a risk-free asset with a risky asset
Only portfolios of risky assets
Only the risk-free asset

Question 22 of 35

The return of a two-asset portfolio is most accurately described as:

A weighted average of the individual asset returns
The product of the individual asset returns
The sum of the individual asset variances

Question 23 of 35

The Markowitz efficient frontier consists of portfolios that lie:

Below the global minimum-variance portfolio on the minimum-variance frontier
Above and to the right of the global minimum-variance portfolio on the minimum-variance frontier
On the capital allocation line only

Question 24 of 35

The covariance between two asset returns can be expressed as:

$Cov(R_1, R_2) = \rho_{12} \sigma_1 \sigma_2$
$Cov(R_1, R_2) = \rho_{12} \sigma_1^2 \sigma_2^2$
$Cov(R_1, R_2) = \sigma_1 + \sigma_2$

Question 25 of 35

A risk-neutral investor most likely makes decisions based solely on:

Expected return, ignoring risk
Risk, ignoring expected return
Both risk and return equally

Question 26 of 35

The variance of a two-asset portfolio is given by the formula $\sigma_P^2 = w_1^2\sigma_1^2 + w_2^2\sigma_2^2 + 2w_1w_2\rho_{12}\sigma_1\sigma_2$. If the correlation ($\rho_{12}$) equals +1, the portfolio standard deviation is most likely equal to:

The weighted average of the individual standard deviations
Less than the weighted average of the individual standard deviations
Zero

Question 27 of 35

A portfolio can be made completely risk-free by combining two assets when their correlation is:

+1
0
-1

Question 28 of 35

A highly risk-averse investor's optimal portfolio on the capital allocation line will most likely be located:

Close to the risk-free asset on the y-axis
At the optimal risky portfolio
Beyond the optimal risky portfolio using leverage

Question 29 of 35

Including international securities in a domestic portfolio is most likely to reduce portfolio risk because international and domestic assets tend to have:

Correlations less than +1
Identical return distributions
Correlations equal to +1

Question 30 of 35

Adding a new asset class that is not perfectly correlated with existing assets will most likely cause the investment opportunity set to:

Shift to the right
Expand to the northwest
Remain unchanged

Question 31 of 35

The risk-return trade-off is most accurately described as:

Higher risk is associated with higher expected return over long periods
Higher risk always guarantees a higher return in any given year
Lower risk assets always outperform higher risk assets

Question 32 of 35

The global minimum-variance portfolio is most accurately described as the portfolio with:

The highest expected return among all risky asset portfolios
The lowest risk among all portfolios of risky assets
Zero risk

Question 33 of 35

As the number of assets in an equally weighted portfolio increases, portfolio variance most likely approaches:

Zero
The average variance of the individual assets
The average covariance among the assets

Question 34 of 35

If Asset 1 has a return of 10% with a weight of 60% and Asset 2 has a return of 20% with a weight of 40%, the portfolio return is closest to:

14%
15%
16%

Question 35 of 35

The minimum-variance frontier is best described as the set of portfolios that have the:

Highest return for each level of risk
Lowest risk for each level of expected return
Highest utility for all investors

Portfolio Risk and Return Part I (Katas)

First Principles Thinking: concept of risk aversion

First Principles Thinking: perfect negative correlation

First Principles Thinking: slope of the CAL

First Principles Thinking: utility of a risk-free asset

First Principles Thinking: covariance vs. correlation

First Principles Thinking: risk-return trade-off across asset classes

First Principles Thinking: risk aversion coefficient

First Principles Thinking: correlation coefficient range

First Principles Thinking: trading cost components

First Principles Thinking: slope of the efficient frontier

First Principles Thinking: when portfolio risk equals weighted average risk

First Principles Thinking: risk tolerance vs. risk aversion

First Principles Thinking: optimal portfolio selection

First Principles Thinking: high correlation and diversification

First Principles Thinking: distributional characteristics

First Principles Thinking: risk hierarchy of asset classes

First Principles Thinking: portfolio risk with zero correlation

First Principles Thinking: correlation and diversification

First Principles Thinking: two-fund separation theorem

First Principles Thinking: diversification and employer stock

First Principles Thinking: capital allocation line

First Principles Thinking: portfolio return calculation

First Principles Thinking: efficient frontier

First Principles Thinking: covariance formula

First Principles Thinking: risk neutrality

First Principles Thinking: perfect positive correlation

First Principles Thinking: eliminating portfolio risk

First Principles Thinking: investor preferences along the CAL

First Principles Thinking: international diversification

First Principles Thinking: expanding the opportunity set

First Principles Thinking: risk-return trade-off

First Principles Thinking: global minimum-variance portfolio

First Principles Thinking: portfolio variance with many assets

First Principles Thinking: weighted average return

First Principles Thinking: minimum-variance frontier