#1
What is the primary objective of portfolio theory?
To balance risk and return
ExplanationAchieve equilibrium between risk and reward.
#2
Which of the following is a key assumption of modern portfolio theory?
Investors are rational and seek to maximize utility
ExplanationAssumption of rational behavior by investors striving for maximum benefit.
#3
What does the efficient frontier represent?
The set of portfolios that offer the highest return for a given level of risk
ExplanationOptimal portfolios providing maximum returns for a specific risk level.
#4
In portfolio theory, what does the term 'diversification' refer to?
All of the above
ExplanationSpreading investments to reduce risk through different assets, industries, or regions.
#5
What is the Sharpe ratio used for in portfolio management?
To measure the risk-adjusted return of an investment
ExplanationQuantifies investment performance considering risk.
#6
What is the formula for calculating the expected return of a portfolio?
Expected Return = ∑(Weight of Asset i * Expected Return of Asset i)
ExplanationExpected return derived from weighted average of asset returns.
#7
What is the main difference between systematic risk and unsystematic risk?
Systematic risk is market-related, while unsystematic risk is asset-specific
ExplanationMarket-related risks versus asset-specific risks.
#8
Which of the following is NOT a component of the Capital Asset Pricing Model (CAPM)?
Specific risk
ExplanationIndividual asset risk not accounted for in CAPM.
#9
Which of the following statements about the Capital Market Line (CML) is true?
The CML shows the relationship between expected return and beta
ExplanationIllustrates expected return as related to systematic risk.
#10
What is the formula for calculating the beta of a security?
Beta = Correlation(Asset, Market) * (Standard Deviation(Asset) / Standard Deviation(Market))
ExplanationBeta determined by asset's correlation and volatility relative to the market.
#11
What is the main drawback of using the Capital Asset Pricing Model (CAPM) in practice?
It assumes a linear relationship between risk and return
ExplanationOversimplified linear risk-return relationship assumption.
#12
Which of the following statements best describes the concept of 'alpha' in portfolio management?
Alpha measures the excess return of a portfolio compared to its benchmark
ExplanationExcess return over benchmark reflecting managerial skill.
#13
Which of the following is a key limitation of using historical data in portfolio management?
All of the above
ExplanationHistorical data limitations include reliance on past performance, ignoring future changes and rare events.