LOS a, (Part 1): Discuss mean–variance analysis and its assumptions.

Q1. Mean-variance analysis assumes that investor preferences depend on all of the following EXCEPT:

A)   correlations among asset returns.

B)   expected asset returns.

C)   skewness of the distribution of asset returns.

Q2. One of the assumptions of mean-variance analysis is that all investors are risk-averse, which means they:

A)   are not willing to make risky investments.

B)   prefer less risk to more for any given level of volatility.

C)   prefer less risk to more for any given level of expected return.

LOS a, (Part 1): Discuss mean–variance analysis and its assumptions. fficeffice" />

Q1. Mean-variance analysis assumes that investor preferences depend on all of the following EXCEPT:

A)   correlations among asset returns.

B)   expected asset returns.

C)   skewness of the distribution of asset returns.

Correct answer is C)

Mean-variance analysis assumes that investors only need to know expected returns, variances, and covariances in order create optimal portfolios. The skewness of the distribution of expected returns can be ignored.

Q2. One of the assumptions of mean-variance analysis is that all investors are risk-averse, which means they:

A)   are not willing to make risky investments.

B)   prefer less risk to more for any given level of volatility.

C)   prefer less risk to more for any given level of expected return.

Correct answer is C)

In mean-variance analysis we assume that all investors are risk averse, which means they prefer less risk to more for any given level of expected return (NOT for any given level of volatility.) It does NOT mean that they are unwilling to take on any risk.

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