1- If the returns on different assets are uncorrelated (pij = 0)

A. An increase in the number of assets in a portfolio may bring the standard deviation of the portfolio close to zero.

B. There will be little gain from diversification

C. Diversification will result in risk averaging but not in risk reduction.

D. The expected return on a portfolio of such assets should be zero.

2-Which of the following statement is true?

A. An efficient portfolio always provides the highest expected rate of return

B. An efficient portfolio has less risk than any other asset or portfolio with comparable expected return and more return than any other asset or portfolio with comparable risk.

C. An efficient portfolio always provides the lowest risk for an investor

D. The main objective of portfolio construction is to have an efficient portfolio.

E. None of the above

3-As more and more stocks are added to portfolio, the average variance of the diversified portfolio approaches to

A. Zero

B. Average covariance of the stocks in portfolio

C. Lowest variance stock

D. Weighted average variance of the stocks in portfolio

4-With a risk- less asset and risky assets, the efficient portfolio opportunity set is a straight line. The statement...

A. is true

B. is false.

C. could be true or false, depending on the correlations of the risky assets.

D. could be true or false, depending on the standard deviation of the risky asset

E. None of the above

5-When correlation between two stocks is perfectly negative, the standard portfolio.

A. will be equal to zero.

B. may be lower than the weighted average standard deviation of the individual

C. will be equal to weighted average standard deviation of the individual stocks

D. will be equal to zero if appropriate weights are chosen according to the deviations of both stocks.

E.will be equal to weighted average standard deviation of the individual stocks weights are chosen

6- If the returns on different assets are perfectly positively correlated (Pij=1)

a. An increase in the number of assets in a portfolio may bring the standard deviation of the portfolio close to zero.

b There will be little gain from diversification.

c.Diversification will result in risk averaging but not in risk reduction.

d.The expected return on a portfolio of such assets should be zero.

7-If the returns on different assets are uncorrelated (pij = -1)

A. An increase in the number of assets in a portfolio may bring the standard deviation of the portfolio a close to zero.

B. There will be little gain from diversification.

C. Diversification will result in risk averaging but not in risk reduction.

D. The expected return on a portfolio of such assets should be zero