Online Quiz Questions for Week 5

Topic: Efficient Portfolios

Question: Assume an investor has the following utility function, U = E(RP) 0.005AP2, where
her degree of risk aversion is 2. To maximise her expected utility, she would choose the asset
with an expected return of ________ and a standard deviation of returns of ________,
respectively.
Correct Answer:

10%; 10%

Question: The variable A in the utility function represents the:

Correct Answer:

Investors aversion to risk

Question: Minimum variance portfolios of n risky securities are portfolios that:

Correct
Answer:

Have the smallest standard deviation of returns for a given level of

expected return

Question: The expected return of a portfolio of risky securities:

Correct Answer:

Is a weighted average of the securities returns

Question: An indifference curve locates the risk return combinations of a number of _____
portfolios that offer the same level of ________ to an investor with a given degree of risk
aversion.
Correct Answer:

hypothetical; utility

Question: The utility score an investor assigns to a particular portfolio, other things equal,
Selected Answer:

Will decrease as the variance of returns decreases

Correct Answer:

none of the above

Response
Feedback:

Utility is enhanced by higher expected returns and diminished by higher

risk.

Question: In the absence of risk-free lending and borrowing, the optimal risky portfolio (ORP)
offers:
Correct Answer:

The largest utility

Question
When two risky securities that are not perfectly positively correlated are held in a
portfolio, the portfolio standard deviation of returns will be ____ the weighted average of the
individual security standard deviations.
Selected Answer:

B or C

Correct Answer:

less than

Response Whenever we use two securities that are less than perfectly positively correlated
Feedback: to form a portfolio, the portfolio standard deviation of returns will be less than
the weighted average standard deviation of returns of the constituent securities.

This risk reduction is the reason for diversification.

Question: The standard deviation of returns of a portfolio of risky securities is:

Correct
Answer:

The square root of the sum of weighted variances and covariances of

returns of the securities

Question: Steve is more risk-averse than Edie. On a graph that shows Steve and Edies
indifference curves, which of the following is true?
Correct Answer:

Steves indifference curves will have steeper slopes than Edies

Question : Other things equal, diversification is most effective when:

Correct Answer:

Securities returns are negatively correlated

Question: Efficient portfolios of n risky securities are portfolios that:

Correct Answer:

Have the largest expected return for a given level of risk

Question: A statistic that measures how the returns of two risky assets move together is:
Correct Answer:

C and D

Question: When two risky securities that are not perfectly positively correlated are held in a
portfolio, the portfolio standard deviation of returns will be ____ the weighted average of the
individual security standard deviations.
Selected Answer:

B or C

Correct Answer:

less than

Response Whenever we use two securities that are less than perfectly positively correlated
Feedback: to form a portfolio, the portfolio standard deviation of returns will be less than
the weighted average standard deviation of returns of the constituent securities.
This risk reduction is the reason for diversification.
Question: The utility score an investor assigns to a particular portfolio, other things equal,
Selected Answer:

Will decrease as the variance of returns decreases

Correct Answer:

none of the above

Response
Feedback:

Utility is enhanced by higher expected returns and diminished by higher

risk.