Multiple choice questions:

1) The diversifiable risk of a portfolio:

a. Is correlated with systematic risk.

b. Can be made sufficiently small.

c. Is zero in the real world.

d. Is the risk that investors lose because of transaction costs.

2)When is the benefit of diversification in a portfolio with two assets largest?

a. When the two assets are perfect positively correlated.

b. When the two assets are independent.

c. When the two assets are perfect negatively correlated.

d. In none of the above cases.

3. Which of the following is not a justification framework for the mean-variance approach?

a. Continuous trading when prices follow a multi-dimensional geometric Brownian motion with drift.

b. The investor's state-specific utility function is quadratic in wealth.

c. Investor's preferences for risk are inter-dependent and serially correlated with asset returns.

d. The returns on all assets are jointly normally distributed.

4. The key assumption behind the single index model is:

a. That investors care only about the returns and the variance of their portfolios.

b. That there is only one systematic factor which drives the returns of all assets.

c. That the risk-free asset exists.

d. That the returns of assets are uncorrelated with each other.