MULTIPLE CHOICE QUESTIONS

1. Select the CORRECT statement from among the following:

a. The risk for a portfolio is a weighted average of individual security risks.

b. Two factors determine portfolio risk.

c. Having established the portfolio weights, the calculation of the expected return on the portfolio is independent of the calculation of portfolio risk.

When adding a security to a portfolio, the average covariance between it and the other securities in the portfolio is less important than the security's own risk.

2. Select the CORRECT statement from among the following:

a. The risk of a portfolio of two securities, as measured by the standard deviation, would consist of two terms.

b. The expected return on a portfolio is usually a weighted average of the expected returns of the individual assets in the portfolio.

c. The risk of a portfolio of four securities, as measured by the standard deviation, would consist of 16 covariances and four variances.

d. Combining two securities with perfect negative correlation could eliminate risk altogether.

3. Select the INCORRECT statement from among the following:

a. Under the Markowitz formulation, a portfolio of 30 securities would have 870 covariances.

b. Under the Markowitz formulation, a portfolio of 30 securities would have 30 variances in the variance-covariance matrix.

c. Under the Markowitz formulation, a portfolio of 30 securities would have 870 terms in the variance-covariance matrix.

d. Under the Markowitz formufation, a portfolio of 30 securities would require 435 unique covariances to calculate portfolio risk.

4. Concerning the riskiness of a portfolio of two securities using the Markowitz model, select the CORRECT statements from among the following set:

a. The riskiness depends on the variability of the securities in the portfolio.

b. The riskiness depends on the percentage of portfolio assets invested in each security.

c. The riskiness depends on the expected return of each security.

d. The riskiness depends on the amount of correlation among the security returns.

e. The riskiness depends on the beta of each security.

5. Select the CORRECT statement from the following statements regarding the Markowitz model:

a. As the number of securities held in a portfolio increases, the importance of each individual security's risk also increases.

b. As the number of securities held in a portfolio increases, the importance of the covariance relationships increases.

c. In a large portfolio, portfolio risk will consist almost entirely of each security's own risk contribution to the total portfolio risk.

d. In a large portfolio, the covariance term can be driven almost to zero.