Challenging Portfolio Flashcards
Statement: In a weak-form efficient market, technical analysis can consistently generate excess returns.
Answer: ❌ False
Weak-form EMH asserts that past price data are fully reflected in current prices, rendering technical analysis ineffective in generating consistent excess returns (Slide 6).
Statement: In the neoclassical framework, risk is quantified using the variance or standard deviation of returns.
Answer: ✅ True
— Neoclassical theory defines risk as volatility (𝜎), assuming normally distributed returns (Slide 7).
Statement: The Capital Market Line (CML) includes all efficient portfolios consisting only of risky assets.
Answer: ❌ False
The CML represents portfolios combining the risk-free asset with the market portfolio, not just risky assets (Slide 13, 28)
Statement: The CAPM suggests that investors are compensated for both systematic and unsystematic risk.
Answer: ❌ False
✅ Correct — Only systematic risk is priced; unsystematic risk is diversifiable and not rewarded
Statement: The beta coefficient in CAPM is a regression slope between the asset return and market return.
Answer: ✅ True
𝛽 ; also interpreted as the regression slope (Slide 31).
Statement: Adding a risk-free asset to the portfolio selection problem bends the efficient frontier into a straight line.
Answer: ✅ True
It becomes the Capital Market Line, a straight tangent from the risk-free rate to the market portfolio (Slide 13).
Statement: The optimal portfolio lies at the point where the investor’s indifference curve is tangent to the efficient frontier of risky assets.
Answer: ✅ True
This is true in absence of a risk-free asset (Slide 25). The tangency point represents utility maximization.
Statement: If two assets are perfectly negatively correlated, their combination can yield a risk-free portfolio.
nswer: ✅ True
✅ Correct — If 𝜌 =− 1, the portfolio variance can reach zero with the right weights.
Statement: The Capital Asset Pricing Model assumes investors have different expectations and time horizons.
Answer: ❌ False
— CAPM assumes homogeneous expectations and a single-period model (standard CAPM assumption).
Statement: A utility function being concave implies the investor is risk-averse
Answer: ✅ True
— Concavity of utility reflects diminishing marginal utility and risk aversion (Slide 7).
Statement: The covariance of an asset with itself is equal to its variance.
Answer: ✅ True
This is a basic identity:
Cov(X,X)=Var(X).
Statement: A passive strategy involves matching the market’s systematic risk using a combination of the risk-free asset and the market portfolio.
Answer: ✅ True
Passive strategies replicate market exposure using beta-weighted portfolios (Slide 35).
