Portfolio Theory: Master the Art of Investment Portfolio Management

Question 1

Which fundamental principle of Modern Portfolio Theory (MPT) emphasizes that diversifying investments can reduce risk without sacrificing return?

Accepted Answer

Diversification principle

Answer

Single-asset investment principle

Answer

Risk-return trade-off principle

Answer

Correlation principle

Question 2

The primary aim of diversification in portfolio management is to:

Accepted Answer

Reduce portfolio risk

Answer

Enhance portfolio returns

Answer

Improve portfolio liquidity

Answer

Minimize tax liabilities

Question 3

How does the variance of a portfolio relate to the variances of its individual assets?

Accepted Answer

The relationship between portfolio variance and individual asset variances depends on the correlation between the assets.

Answer

The portfolio variance is always lower than the weighted average of the individual asset variances.

Answer

The portfolio variance is always higher than the weighted average of the individual asset variances.

Answer

The portfolio variance is equal to the weighted average of the individual asset variances.

Question 4

What is the primary risk associated with investing solely in a single asset?

Accepted Answer

Concentration risk

Answer

Systematic risk

Answer

Unsystematic risk

Answer

Inflation risk

Question 5

Which measure quantifies an asset's return sensitivity to overall market movements?

Accepted Answer

Beta

Answer

Alpha

Answer

Sharpe ratio

Answer

Sortino ratio

Question 6

In portfolio management, what is the primary role of the Capital Asset Pricing Model (CAPM)?

Accepted Answer

Determining expected return for a given level of risk

Answer

Identifying undervalued assets

Answer

Predicting future market returns

Answer

Eliminating all risk from a portfolio

Question 7

What is the main purpose of rebalancing a portfolio?

Accepted Answer

Preserving the desired asset allocation

Answer

Reducing portfolio risk

Answer

Increasing portfolio returns

Answer

Avoiding tax liabilities

Question 8

Which of the following statements best describes the concept of diversification as it applies to investment portfolios?

Accepted Answer

Investing in a variety of assets to mitigate overall risk

Answer

Investing in a single asset class with high risk and return

Answer

Investing only in assets with low correlation

Answer

Investing in assets with high volatility and correlation

Question 9

What is the primary goal of asset allocation within portfolio management?

Accepted Answer

To achieve a specific balance of risk and return

Answer

To maximize return

Answer

To minimize risk

Answer

To eliminate volatility

Question 10

Which of the following is considered a quantitative measure of portfolio risk?

Accepted Answer

Standard deviation

Answer

Beta

Answer

Alpha

Answer

Sharpe Ratio

Question 11

The Capital Asset Pricing Model (CAPM) suggests that the expected return of an asset is influenced primarily by its:

Accepted Answer

Beta and market risk premium

Answer

Risk-free rate and market risk premium

Answer

Standard deviation and correlation

Answer

Alpha and beta

Question 12

The Sharpe Ratio is utilized to assess:

Accepted Answer

Excess return per unit of risk

Answer

Risk per unit of excess return

Answer

Correlation between the portfolio and its benchmark

Answer

Standard deviation of the portfolio

Question 13

Which of the following is NOT a key principle of Modern Portfolio Theory (MPT)?

Accepted Answer

Short-term speculation

Answer

Diversification

Answer

Risk and return analysis

Answer

Asset allocation

Question 14

The 'efficient frontier' in MPT represents:

Accepted Answer

The set of portfolios that offer the best risk-return trade-off

Answer

The combination of assets with the highest expected return

Answer

The combination of assets with the lowest possible risk

Answer

The portfolio with the highest Sharpe ratio

Question 15

Standard deviation is primarily used to measure:

Accepted Answer

The volatility of an asset or portfolio

Answer

The correlation between two assets or portfolios

Answer

The excess return of an asset or portfolio over the risk-free rate

Answer

The beta of an asset or portfolio

Question 16

The Sharpe ratio is used to assess:

Accepted Answer

The excess return of an asset or portfolio over the risk-free rate relative to its volatility

Answer

The volatility of an asset or portfolio

Answer

The correlation between two assets or portfolios

Answer

The beta of an asset or portfolio

Question 17

The process of matching an investor's risk tolerance and financial goals with an appropriate portfolio is called:

Accepted Answer

Asset allocation

Answer

Diversification

Answer

Risk management

Answer

Portfolio optimization

Question 18

Which of the following is a fundamental principle of modern portfolio theory?

Accepted Answer

Diversification can reduce risk.

Answer

Higher expected returns are always associated with higher risks.

Answer

Individual assets consistently deliver higher returns than diversified portfolios.

Answer

Investing solely in a single asset eliminates investment risk.

Question 19

Which of the following factors should NOT be considered when determining an asset allocation strategy?

Accepted Answer

Historical performance of individual assets.

Answer

Investor's financial objectives.

Answer

Investor's tolerance for risk.

Answer

Current market conditions.

Question 20

Which of the following is **NOT** a key assumption of Modern Portfolio Theory (MPT)?

Accepted Answer

All investors have the same investment horizon.

Answer

Investors are rational and risk-averse.

Answer

Investments are perfectly divisible.

Answer

The expected return of an asset is directly proportional to its risk.

Question 21

Diversification in portfolio construction primarily aims to:

Accepted Answer

Reduce the overall risk of the portfolio.

Answer

Eliminate all investment risk.

Answer

Maximize portfolio volatility.

Answer

Increase the liquidity of the portfolio.

Question 22

According to the Capital Asset Pricing Model (CAPM), the expected return of an asset is primarily influenced by:

Accepted Answer

Its beta coefficient and the risk-free rate.

Answer

Its alpha coefficient and the expected market return.

Answer

Its standard deviation and the correlation coefficient.

Answer

Its Sharpe ratio and the maximum drawdown.

Question 23

The Sharpe ratio primarily measures the:

Accepted Answer

Excess return per unit of risk.

Answer

Standard deviation of returns.

Answer

Beta coefficient of an asset.

Answer

Correlation coefficient between two assets.

Question 24

The correlation coefficient between two assets primarily indicates:

Accepted Answer

The extent to which their returns move in the same direction.

Answer

The extent to which their returns move in opposite directions.

Answer

The volatility of each asset.

Answer

The expected return of each asset.

Question 25

The optimal portfolio for an investor should:

Accepted Answer

Balance risk and return based on the investor's preferences.

Answer

Maximize the expected return.

Answer

Minimize the risk.

Answer

Provide the highest possible Sharpe ratio.

Question 26

Which of the following is a benefit of diversification?

Accepted Answer

It reduces the overall risk of a portfolio without significantly reducing its expected return.

Answer

It increases the expected return of a portfolio.

Answer

It eliminates the risk of any individual asset.

Answer

It guarantees a positive return on investment.

Question 27

What is the Sharpe ratio?

Accepted Answer

A measure of the excess return of a portfolio relative to the risk-free rate, adjusted for the portfolio's risk.

Answer

A measure of the risk of a portfolio relative to its expected return.

Answer

A measure of the diversification of a portfolio.

Answer

A measure of the correlation between two portfolios.

Question 28

What is the purpose of a security market line (SML)?

Accepted Answer

To represent the relationship between risk and expected return for individual assets.

Answer

To determine the beta of a portfolio.

Answer

To calculate the alpha of an investment strategy.

Answer

To measure the correlation between two assets.

Question 29

Which of the following is a key principle of modern portfolio theory?

Accepted Answer

Diversification reduces risk and enhances return

Answer

Risk and return are always positively correlated

Answer

Asset allocation is irrelevant to portfolio performance

Answer

High-return assets should be heavily favored in portfolio construction

Question 30

According to Markowitz's theory, the optimal portfolio is the one that:

Accepted Answer

Meets the specific risk tolerance and financial goals of the investor

Answer

Maximizes expected return

Answer

Minimizes variance

Answer

Has the highest Sharpe ratio

Question 31

Which of the following is a key benefit of diversification?

Accepted Answer

It reduces unsystematic risk

Answer

It increases the overall return of the portfolio

Answer

It eliminates systematic risk

Answer

It eliminates the correlation between assets

Question 32

What is the primary purpose of a Sharpe ratio?

Accepted Answer

To measure the risk-adjusted return of a portfolio

Answer

To compare the performance of different portfolios

Answer

To determine the expected return of a portfolio

Answer

To calculate the volatility of a portfolio

Question 33

Which principle of Modern Portfolio Theory states that diversification can reduce portfolio risk?

Accepted Answer

True

Answer

False

Question 34

The correlation coefficient between two assets measures the extent to which their returns:

Accepted Answer

Move together

Answer

Move in opposite directions

Answer

Have the same volatility

Answer

Have the same expected return

Question 35

What is the efficient frontier?

Accepted Answer

The set of portfolios with the lowest possible risk for a given expected return

Answer

The set of portfolios with the highest possible return for a given level of risk

Answer

The set of portfolios that lie on the capital market line

Answer

The set of portfolios that maximize the Sharpe ratio

Question 36

Which assumption is key to the Capital Asset Pricing Model (CAPM)?

Accepted Answer

The market is in equilibrium

Answer

Investors are risk-averse

Answer

All investors have the same investment horizon

Answer

There are no transaction costs

Question 37

The beta of a stock measures its:

Accepted Answer

Correlation with the market

Answer

Volatility

Answer

Expected return

Answer

Risk-free rate

Question 38

Which asset allocation strategy is used to adjust portfolio holdings based on short-term market conditions?

Accepted Answer

Tactical asset allocation

Answer

Strategic asset allocation

Answer

Satellite asset allocation

Question 39

What is the primary purpose of asset rebalancing in portfolio management?

Accepted Answer

To maintain the desired risk-return profile

Answer

To maximize portfolio return

Answer

To minimize portfolio risk

Answer

To reduce transaction costs

Question 40

What is the primary goal of portfolio optimization?

Accepted Answer

To achieve a desired level of risk and return

Answer

To maximize portfolio return

Answer

To minimize portfolio risk

Answer

To reduce transaction costs