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Reading 50: An Introduction to Portfolio Management - LOS

Q1. Which of the following statements about risk aversion is TRUE?

A)   Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk.

B)   Risk averse investors will not take on risk.

C)   Risk aversion implies that the risk-return line, the CML, and the SML are downward sloping curves.

Q2. The basic premise of the risk-return trade-off suggests that risk-averse individuals purchasing investments with higher non-diversifiable risk should expect to earn:

A)   lower rates of return.

B)   rates of return equal to the market.

C)   higher rates of return.

Q3. Which of the following statements is NOT consistent with the assumption that individuals are risk averse with their investment portfolios?

A)   Higher betas are associated with higher expected returns.

B)   Many individuals purchase lottery tickets.

C)   There is a positive relationship between expected returns and expected risk.

Q4. Risk aversion means that if two assets have identical expected returns, an individual will choose the asset with the:

A)   higher standard deviation.

B)   lower risk level.

C)   shorter payback period.

Q5. Which of the following statements about portfolio diversification is TRUE?

A)   When a risk-averse investor is confronted with two investment opportunities having the same expected return, the investor will take the opportunity with the lower risk.

B)   The efficient frontier represents individual securities.

C)   As the correlation coefficient moves from +1 to zero, the potential for diversification diminishes.

答案和详解如下:

Q1. Which of the following statements about risk aversion is TRUE?

A)   Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk.

B)   Risk averse investors will not take on risk.

C)   Risk aversion implies that the risk-return line, the CML, and the SML are downward sloping curves.

Correct answer is A)

Risk aversion implies that an investor will not assume risk unless compensated.

Q2. The basic premise of the risk-return trade-off suggests that risk-averse individuals purchasing investments with higher non-diversifiable risk should expect to earn:

A)   lower rates of return.

B)   rates of return equal to the market.

C)   higher rates of return.

Correct answer is C)

Investors are risk averse.  Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk.  This means that there is a positive relationship between expected returns (ER) and expected risk (Es) and the risk return line (capital market line [CML] and security market line [SML]) is upward sweeping.

Q3. Which of the following statements is NOT consistent with the assumption that individuals are risk averse with their investment portfolios?

A)   Higher betas are associated with higher expected returns.

B)   Many individuals purchase lottery tickets.

C)   There is a positive relationship between expected returns and expected risk.

Correct answer is B)

Investors are risk averse. Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk. This means that there is a positive relationship between expected returns (ER) and expected risk and the risk return line (capital market line [CML] and security market line [SML]) is upward sweeping. However, investors can be risk averse in one area and not others, as evidenced by their purchase of lottery tickets.

Q4. Risk aversion means that if two assets have identical expected returns, an individual will choose the asset with the:

A)   higher standard deviation.

B)   lower risk level.

C)   shorter payback period.

Correct answer is B)

Investors are risk averse.  Given a choice between assets with equal rates of expected return, the investor will always select the asset with the lowest level of risk.  This means that there is a positive relationship between expected returns (ER) and expected risk (Es) and the risk return line (capital market line [CML] and security market line [SML]) is upward sloping.

Standard deviation is a way to quantify risk. The payback period is used to evaluate capital projects, not investment returns.

Q5. Which of the following statements about portfolio diversification is TRUE?

A)   When a risk-averse investor is confronted with two investment opportunities having the same expected return, the investor will take the opportunity with the lower risk.

B)   The efficient frontier represents individual securities.

C)   As the correlation coefficient moves from +1 to zero, the potential for diversification diminishes.

Correct answer is A)

The other statements are false. The lower the correlation coefficient; the greater the potential for diversification. Efficient portfolios lie on the efficient frontier.

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