investmen exercisesTBChap08new.docVIP

CHAPTER 8 AN INTRODUCTION TO PORTFOLIO MANAGEMENT TRUE/FALSE QUESTIONS (t) 1 Risk is defined as the uncertainty of future outcomes. (t) 2 A basic assumption of the Markowitz model is that investors base decisions solely on expected return and risk. (t) 3 The yield spread between yields on AAA bonds and BAA bonds is evidence that investors are risk averse. (t) 4 Standardizing the covariance by the individual standard deviation yields the correlation coefficient. (t) 5 The covariance is a measure of the degree to which two variables (e.g., rates of return) move together over time relative to their means. (f) 6 For a two stock portfolio containing Stocks i and j, the correlation coefficient of returns (ri,j) is equal to the square root of the covariance (covi,j). (f) 7 To reduce the standard deviation of a portfolio it is necessary to increase the relative weight of assets with low volatility (small standard deviation of returns). (t) 8 Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio. (f) 9 A basic assumption of portfolio theory is that an investor would want to maximize risk subject to a given level of return. (t) 10 Most investors hold a diversified portfolio in order to reduce portfolio risk. (f) 11 Most assets of the same type have negative covariances of returns with each other. MULTIPLE CHOICE QUESTIONS (a) 1 The optimal portfolio is identified at the point of tangency between the efficient frontier and the highest possible utility curve. lowest possible utility curve. middle range utility curve. steepest utility curve. flattest utility curve. (d) 2 An individual investor’s utility curves specify the tradeoffs he or she is willing to make between high risk and low risk assets. high return and low return assets. covariance and correlation. return and risk. efficient portfolios. (c) 3 As the correlation coefficient between two assets decreases