Investment Risk and Portfolio Optimization - Prof. Donna Dudney, Quizzes of Finance

Download Investment Risk and Portfolio Optimization - Prof. Donna Dudney and more Quizzes Finance in PDF only on Docsity! Quiz 3 An investor's degree of risk aversion will determine his or her _______. Answer: Optimal mix of the risk-free asset and optimal risky asset As you lengthen the time horizon of your investment period and decide to invest for multiple years you will find that I. the average risk per year may be smaller over longer investment horizons II. the variance of the total rate of return on your investment will be larger III. your overall risk on the investment will fall Answer: I and II only The optimal risky portfolio can be identified by finding _____________. I. the minimum variance point on the efficient frontier II. the maximum return point on the efficient frontier the minimum variance point on the efficient frontier III. the tangency point of the capital market line and the efficient frontier IV. the line with the steepest slope that connects the risk free rate to the efficient frontier Answer: III and IV only An important characteristic of market equilibrium is ________________. Answer: The absence of arbitrage opportunities According to the capital asset pricing model, __________. Answer: All securities' returns must lie on the security market line Based on the outcomes in the table below choose which of the statements is/are correct: I. The covariance of Security A and Security B is zero II. The correlation coefficient between Security A and C is negative III. The correlation coefficient between Security B and C is positive Answer: I and II only The _______ decision should take precedence over the _____ decision. Answer: Asset allocation, stock selection The beta of a security is equal to __________. Answer: The covariance between the security and market returns divided by the variance of the market's returns Reference: Stock The stock is ______ riskier than the typical stock. Answer: 32% The graph of the expected return beta relationship in the CAPM context is called the __________. Answer: SML