andytrader

Which of the following statements concerning the efficient frontier is most accurate? It is the:

A) set of portfolios that gives investors the lowest risk.

B) set of portfolios that gives investors the highest return.

C) set of portfolios where there are no more diversification benefits.

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The efficient frontier outlines the set of portfolios that gives investors the highest return for a given level of risk or the lowest risk for a given level of return. It is also the point at which there are no more benefits to diversification.

andytrader

Which one of the following portfolios does not lie on the efficient frontier?

Portfolio	Expected Return	Standard Deviation
A	7	5
B	9	12
C	11	10
D	15	15

A) A.

B) B.

C) C.

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Portfolio B has a lower expected return than Portfolio C with a higher standard deviation.

andytrader

In a two-asset portfolio, reducing the correlation between the two assets moves the efficient frontier in which direction?

A) The efficient frontier is stable unless the asset’s expected volatility changes. This depends on each asset’s standard deviation.

B) The frontier extends to the left, or northwest quadrant representing a reduction in risk while maintaining or enhancing portfolio returns.

C) The efficient frontier is stable unless return expectations change. If expectations change, the efficient frontier will extend to the upper right with little or no change in risk.

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Reducing correlation between the two assets results in the efficient frontier expanding to the left and possibly slightly upward. This reflects the influence of correlation on reducing portfolio risk.

andytrader

On a graph of risk, measured by standard deviation and expected return, the efficient frontier represents:

A) the group of portfolios that have extreme values and therefore are “efficient” in their allocation.

B) all portfolios plotted in the northeast quadrant that maximize return.

C) the set of portfolios that dominate all others as to risk and return.

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The efficient set is the set of portfolios that dominate all other portfolios as to risk and return. That is, they have highest expected return at each level of risk.

andytrader

Which of the following statements about the efficient frontier is NOT correct?

A) The efficient frontier line bends backwards due to less than perfect correlation between assets.

B) A portfolio to the left of the efficient frontier is not attainable, while a portfolio to the right of the efficient frontier is inefficient.

C) The slope of the efficient frontier increases steadily as one moves up the curve.

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This statement should read, "The slope of the efficient frontier decreases steadily as one moves up the curve." The other statements are true.

andytrader

In a set of portfolios, the portfolio with the highest rate of return, but the same variance of the rate of return as the others, would be considered a(n):

A) positive beta portfolio.

B) efficient portfolio.

C) positive alpha portfolio.

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The efficient frontier, which represents the set of portfolios that provides the highest return at each level of risk, is comprised of efficient portfolios. The optimal portfolio for each investor is the point on the highest indifference curve that is tangent to the efficient frontier.

andytrader

Which of the following inputs is least likely required for the Markowitz efficient frontier? The:

A) covariation between all securities.

B) expected return of all securities.

C) level of risk aversion in the market.

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The level of risk aversion in the market is not a required input. The model requires that investors know the expected return and variance of each security as well as the covariance between all securities.

andytrader

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) higher rates of return.

C) rates of return equal to the market.

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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.

andytrader

Which of the following statements about portfolio diversification is CORRECT?

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.

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

andytrader

Which of the following statements best describes risk aversion?

A) Given a choice between two assets of equal return, the investor will choose the asset with the least risk.

B) There is an indirect relationship between expected returns and expected risk.

C) The investor will always choose the asset with the least risk.

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Risk aversion is best defined as: given a choice between two assets of equal return, the investor will choose the asset with the least risk. The investor will not always choose the asset with the least risk or the asset with the least risk and least return. As well, there is a positive, not indirect, relationship between risk and return.