Chapter 07  Optimal Risky Portfolios
Chapter 07
Optimal Risky Portfolios
Multiple Choice Questions
1. Market risk is also referred to as
A.
systematic risk, diversifiable risk.
B.
systematic risk, nondiversifiable risk.
C.
unique risk, nondiversifiable risk.
D.
unique risk, diversifiable risk.
E.
none of the above.
Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be
eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firmspecific risks are
synonyms referring to the risk that can be eliminated from the portfolio by diversification.
Difficulty: Easy
4. Diversifiable risk is also referred to as
A.
systematic risk, unique risk.
B.
systematic risk, market risk.
C.
unique risk, market risk.
D.
unique risk, firmspecific risk.
E.
none of the above.
Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be
eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firmspecific risks are
synonyms referring to the risk that can be eliminated from the portfolio by diversification.
Difficulty: Easy
6. Firmspecific risk is also referred to as
A.
systematic risk, diversifiable risk.
B.
systematic risk, market risk.
C.
diversifiable risk, market risk.
D.
diversifiable risk, unique risk.
E.
none of the above.
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Market, systematic, and nondiversifiable risk are synonyms referring to the risk that cannot be
eliminated from the portfolio. Diversifiable, unique, nonsystematic, and firmspecific risks are
synonyms referring to the risk that can be eliminated from the portfolio by diversification.
10. The variance of a portfolio of risky securities
A.
is a weighted sum of the securities' variances.
B.
is the sum of the securities' variances.
C.
is the weighted sum of the securities' variances and covariances.
D.
is the sum of the securities' covariances.
E.
none of the above.
The variance of a portfolio of risky securities is a weighted sum taking into account both the
variance of the individual securities and the covariances between securities.
Difficulty: Moderate
13. Other things equal, diversification is most effective when
A.
securities' returns are uncorrelated.
B.
securities' returns are positively correlated.
C.
securities' returns are high.
D.
securities' returns are negatively correlated.
E.
B and C.
Negative correlation among securities results in the greatest reduction of portfolio risk, which
is the goal of diversification.
Difficulty: Moderate
14. The efficient frontier of risky assets is
A.
the portion of the investment opportunity set that lies above the global minimum variance
portfolio.
B.
the portion of the investment opportunity set that represents the highest standard
deviations.
C.
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 Spring '09
 WUXueping
 Standard Deviation, Capital Asset Pricing Model, Modern portfolio theory, OPTIMAL RISKY PORTFOLIOS

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