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Exam 8: Portfolio Selection and Asset Allocation

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Question 1

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Which of the following funds would provide the most diversification benefit if added to a portfolio of 50 stocks that was spread across industries? A fund that tracks the:

A) emerging markets.
B) NAREIT index.
C) S&P GSCI.
D) S&P 500.

E) B) and D)
F) A) and D)

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Question 2

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An index commonly used as a proxy for developed market international equities is the:

A) MSCI EAFE Index.
B) MSCI Emerging Markets Index.
C) Russell 1000 Index.
D) FTSE NAREIT Index.

E) None of the above
F) All of the above

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Question 3

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The purpose of diversification is to:

Research shows asset allocation decisions explain approximately 90% of the variation in portfolio returns, whereas individual security selection explains only about 10%.

Which of the following is not an assumption of Markowitz portfolio theory?

Karl invested his entire portfolio in a randomly-selected, single stock. Which of the following best approximates the standard deviation that Walter should expect for his portfolio?

Based on history, an investor would have a lower risk level with a portfolio consisting of:

Markowitz derived the efficient frontier as an upward-sloping straight line.

Distinguish between systematic and unsystematic risk. What are two other names for each? Give examples of each.

An investor holds a portfolio invested entirely in stock LMN, which has a standard deviation of 20%. Assume the investor sells 50% of his LMN holdings and invests the sale proceeds in stock XYZ, which has a 10% standard deviation and a correlation of 1.0 with stock LMN. A. Has the investor reduced the risk of his portfolio? Explain why or why not. B. If stock XYZ had a correlation of 0 with stock LMN, would the investor reduce portfolio risk? Explain why or why not.

The returns from precious metals funds are quite similar across fund type.

Investors that are highly risk averse have steeper indifference curves.

Under the Markowitz model, the risk of a portfolio is measured by the standard deviation of the portfolio returns.

Asset allocation explains less than 50 percent of the variance in quarterly returns for a typical pension fund.

Which of the following would not be considered a source of systematic risk?

The optimal portfolio is the efficient portfolio with the:

A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk.

According to the Markowitz model, an efficient portfolio is one that has the:

What variable is manipulated to determine efficient portfolios, and why are the other variables not changed?

The Markowitz model assumes that investors are "risk averse", which means that they: