A(n) _________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.

21. A(n) _________ portfolio maximizes return for a given level of risk, or minimizes risk
for a given level of return.
(a) efficient
(b) coefficient
(c) continuous
(d) risk-indifferent
Answer: A
Level of Difficulty: 1
Learning Goal: 3
Topic: Efficient Portfolios
22. A collection of assets is called a(n)
(a) grouping.
(b) portfolio.
(c) investment.
(d) diversity.
Answer: B
Level of Difficulty: 1
Learning Goal: 3
Topic: Portfolio Risk and Return
23. An efficient portfolio is one that
(a) maximizes risk for a given level of return.
(b) maximizes return for a given level of risk.
(c) minimizes return for a given level of risk.
(d) maximizes return at all risk levels.
Answer: B
Level of Difficulty: 1
Learning Goal: 3
Topic: Efficient Portfolios
24. The _________ is a statistical measure of the relationship between series of numbers.
(a) coefficient of variation
(b) standard deviation
(c) correlation
(d) probability
Answer: C
Level of Difficulty: 2
Learning Goal: 3
Topic: Correlation and Portfolio Risk
25. The goal of an efficient portfolio is to
(a) maximize risk for a given level of return.
(b) maximize risk in order to maximize profit.
(c) minimize profit in order to minimize risk.
(d) minimize risk for a given level of return.
Answer: D
Level of Difficulty: 3
Learning Goal: 3
Topic: Efficient Portfolios
26. Perfectly _________ correlated series move exactly together and have a correlation
coefficient of _________, while perfectly _________ correlated series move exactly in
opposite directions and have a correlation coefficient of _________.
(a) negatively; –1; positively; +1
(b) negatively; +1; positively; –1
(c) positively; –1; negatively; +1
(d) positively; +1; negatively; –1
Answer: D
Level of Difficulty: 3
Learning Goal: 3
Topic: Correlation and Portfolio Risk
27. Combining negatively correlated assets having the same expected return results in a
portfolio with _________ level of expected return and _________ level of risk.
(a) a higher; a lower
(b) the same; a higher
(c) the same; a lower
(d) a lower; a higher
Answer: C
Level of Difficulty: 3
Learning Goal: 3
Topic: Correlation and Portfolio Risk
28. An investment advisor has recommended a $50,000 portfolio containing assets R, J,
and K; $25,000 will be invested in asset R, with an expected annual return of 12
percent; $10,000 will be invested in asset J, with an expected annual return of 18
percent; and $15,000 will be invested in asset K, with an expected annual return of 8
percent. The expected annual return of this portfolio is
(a) 12.67%.
(b) 12.00%.
(c) 10.00%.
(d) unable to be determined from the information provided.
Answer: B
Level of Difficulty: 3
Learning Goal: 3
Topic: Portfolio Return (Equation 5.5)
Table 5.1
Expected Return (%)
Year Asset A Asset B Asset C
1 6 8 6
2 7 7 7
3 8 6 8
29. The correlation of returns between Asset A and Asset B can be characterized as (See
Table 5.1)
(a) perfectly positively correlated.
(b) perfectly negatively correlated.
(c) uncorrelated.
(d) cannot be determined.
Answer: B
Level of Difficulty: 4
Learning Goal: 3
Topic: Correlation and Portfolio Risk
30. If you were to create a portfolio designed to reduce risk by investing equal proportions
in each of two different assets, which portfolio would you recommend? (See Table 5.1)
(a) Assets A and B
(b) Assets A and C
(c) none of the available combinations
(d) cannot be determined
Answer: A
Level of Difficulty: 4
Learning Goal: 3
Topic: Correlation and Portfolio Risk