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Portfolio return is a linear combination of individual securities whereas portfolio risk is nonlinear?
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- Considering the attached set of securities and portfolio returns: Find the combination of the weights that minimizes CV of the portfolio. How does the CV of the optimal portfolio compare with the CVs of its constituents?It is said that the key factor that determines the risk of stocks in a large portfolio is not the risk of the individual assets but the covariances of the securities in the portfolio. What does this mean?The measure of risk for a security held in a diversified portfolio is:a. Specific risk.b. Standard deviation of returns.c. Reinvestment risk.d. Covariance.
- Which one of the following is a property of a pure arbitrage portfolio?a. Negative investment.b. Zero return.c. Positive systematic risk.d. Zero total risk.Define the real risk-free rate (r*). What security canbe used as an estimate of r*? What is the nominalrisk-free rate (rRF)? What securities can be used asestimates of rRF?understand the importance of weighting securities in a portfolio?
- Portfolio theory as described by Markowitz is most concerned with:a. The elimination of systematic risk.b. The effect of diversification on portfolio risk.c. The identification of unsystematic risk.d. Active portfolio management to enhance return.The security market line depicts:a. A security’s expected return as a function of its systematic risk.b. The market portfolio as the optimal portfolio of risky securities.c. The relationship between a security’s return and the return on an index.d. The complete portfolio as a combination of the market portfolio and the risk-free asset.Which of the following is TRUE? To construct a capital market line, we use expected return as y-axis and beta as x-axis On the capital market line debt securities are located to the right of the market portfolio To construct a security market line, we use expected return as y-axis and beta as x-axis Market portfolio lays at an intersection of the average indifference curve of a risk-averse investor and the efficient portfolio
- It measures the sensitivity of the return of a security to changes in the return of a common index taken to be a proxy of the market portfolio. A. alpha B. sharpe index C. treynor index D. BetaAccording to modern portfolio theory, pair-wise covariance is more important to total portfolio risk than individual security variance. True or FalseDiscuss the role of risk-free assets in the Markowitz Portfolio Theory.
