CHAPTER 11 Flashcards
A portfolio weight is the fraction of the total investment in the portfolio held in
an individual investment in the portfolio.
YES
The expected return of a portfolio is simply the weighted average of the expected
returns of the investments within the portfolio.
YES
Portfolio weights add up to 1 so that they represent the way we have divided
our money between the different individual investments in the portfolio.
YES
Without trading, the portfolio weights will decrease for the stocks in the
portfolio whose returns are above the overall portfolio return.
NO
Without trading, the portfolio weights will increase for the stocks in
the portfolio whose returns are above the overall portfolio return.
YES
Correlation is the expected product of the deviations of two returns.
NO
Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio.
YES
The covariance and correlation allow us to measure the co-movement of returns.
YES
The amount of risk that is eliminated in a portfolio depends on the degree to
which the stocks face common risks and their prices move together.
YES
If two stocks move together, their returns will tend to be above or below average
at the same time, and the covariance will be positive.
YES
Dividing the covariance by the volatilities ensures that correlation is always
between -1 and +1.
YES
The closer the correlation is to 0, the more the returns tend to move together as a
result of common risk.
NO
Volatility is the square root of variance.
YES
The closer the correlation is to 1, the more the returns tend to move
together as a result of common risk.
YES
When the covariance equals 0, the stocks have no tendency to move either
together or in opposition of one another.
YES
The closer the correlation is to -1, the more the returns tend to move in opposite
directions.
YES
The variance of a portfolio depends only on the variance of the individual stocks.
NO
The variance of a portfolio depends on the variance and correlations
of the individual stocks.
YES
A stock’s return is perfectly positively correlated with itself.
YES
The volatility declines as the number of stocks in a portfolio grows.
YES
The variance of a portfolio is equal to the weighted average covariances of each stock within the portfolio.
YES
The variance of a portfolio is equal to the sum of the covariances of the returns of all pairs of stocks in the portfolio multiplied by each of their portfolio weights.
YES
The variance of a portfolio is equal to the weighted average correlation of each
stock within the portfolio.
NO
Nearly half of the volatility of individual stocks can be eliminated in a large
portfolio as a result of diversification.
YES
Each security contributes to the volatility of the portfolio according to its
volatility, scaled by its covariance with the portfolio, which adjusts for the
fraction of the total risk that is common to the portfolio.
NO
The overall variability of the portfolio depends on the total co-movement of the
stocks within it.
YES
The expected return of a portfolio is equal to the weighted average expected
return, but the volatility of a portfolio is less than the weighted average volatility.
YES
We say a portfolio is an efficient portfolio whenever it is possible to find another
portfolio that is better in terms of both expected return and volatility.
NO
We say a portfolio is an efficient portfolio whenever it is not possible to find another portfolio that is better in terms of both expected return and volatility.
YES
We can rule out inefficient portfolios because they represent inferior investment
choices.
YES
Correlation has no effect on the expected return on a portfolio.
YES
The volatility of the portfolio will differ, depending on the correlation between
the securities in the portfolio.
YES
The efficient portfolios are those portfolios offering the highest possible expected
return for a given level of volatility.
YES
We say a portfolio is long those stocks that have negative portfolio weights.
NO
When two stocks are perfectly negatively correlated, it becomes possible to hold a portfolio that bears absolutely no risk.
YES
The lower the correlation of the securities in a portfolio the lower the volatility we can obtain.
YES
To arrive at the best possible set of risk and return opportunities, we should keep
adding stocks until all investment opportunities are represented.
YES
Adding new investment opportunities allows for greater diversification and
improves the efficient frontier.
YES
Graphically, the efficient portfolios are those on the northeast edge of the set of
possible portfolios, an area which we call the efficient frontier.
NO
We say a portfolio is short those stocks that have negative portfolio weights.
YES
A portfolio that consists of a long position in the risk-free investment is known
as a levered portfolio.
NO
Our total volatility is only a fraction of the volatility of the efficient portfolio,
based on the amount we invest in the risk free asset.
YES
The volatility of the risk-free investment is zero.
YES
The optimal portfolio will not depend on the investor’s personal tradeoff
between risk and return.
YES
The Sharpe ratio is the number of stand deviations the portfolio’s return would
have to fall to under-perform the risk-free investment.
YES
The slope of the line through a given portfolio is often referred to as the Sharpe
ratio of the portfolio.
YES
The Sharpe ratio measures the ratio of volatility-to-reward provided by a
portfolio.
NO
The Sharpe ratio measures the ratio of reward-to-volatility provided
by a portfolio.
YES
Borrowing money to invest in stocks is referred to as buying stocks on margin.
YES
To earn the highest possible expected return for any level of volatility we must
find the portfolio that generates the steepest possible line when combined with
the risk-free investment.
YES
As we increase the fraction invested in the efficient portfolio, we increase our
risk premium but not our risk proportionately.
NO
If we increase the fraction invested in the efficient portfolio beyond 100%m we
are short selling the risk-free investment.
YES
Every investor should invest in the tangent portfolio independent of his or her
taste for risk.
YES
When the CAPM assumptions hold, choosing an optimal portfolio is relatively
straightforward: it is the combination of the risk-free investment and the market
portfolio.
YES
A portfolio’s risk premium and volatility are determined by the fraction that is
invested in the market.
YES
Because all investors should hold the risky securities in the same proportions as
the efficient portfolio, their combined portfolio will also reflect the same
proportions as the efficient portfolio.
YES
Graphically, when the tangent line goes through the market portfolio, it is called
the security market line (SML).
NO
Graphically, when the tangent line goes through the market portfolio,
it is called the capital market line (CML).
YES
When borrowing and lending occur at different rates there are different tangent
portfolios identified.
YES
The SML is still valid when interest rates differ.
YES
In the real world investors have different information and expectations regarding securities.
YES
Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities.
NO
