Lesson 5: Investment Portfolio theories

Question 1

Collection of securities

Answer 1

Portfolio

Question 2

uncertainty of future outcomes

Answer 2

Risk

Question 3

cautious

Answer 3

Risk Averse

Question 4

Markowitz Portfolio Theory

Answer 4

Harry Markowitz

Question 5

Considers the expected rate of return and risk of individual stocks and their interrelationship as measured by correlation

Answer 5

Markowitz Portfolio Theory

Question 6

Considers the correlation between the returns on investments

Answer 6

Markowitz Portfolio Theory

Question 7

Investors are assumed to prefer higher levels of return to lower levels of return

Answer 7

Assumption of nonsatiation

Question 8

Investors are assumed to be risk averse

Answer 8

Assumption of Risk Aversion

Question 9

theory that states that an investor will choose his optimal portfolio from the set of the portfolios that offer maximum expected return of varying level of risk and offer minimum risk for varying levels of expected return

Answer 9

Efficient set of theorem

Question 10

portfolios that the investor will find as optimal ones (portfolios lying in the northwest boundary)

Answer 10

Efficient set of portfolios

Question 11

the curve in the risk-return space with the highest expected rates of return for each level of risk

Answer 11

Efficient frontier

Question 12

represents all portfolios that can be formed from the number of securities

Answer 12

Feasible Set

Question 13

theoretical concept that represents all portfolios that optimally combine risk and return

Answer 13

Capital Market Line

Question 14

bundle of investments that includes every type of asset

Answer 14

Market Portfolio

Question 15

Compute the expected return of the portfolio below:

Weight
0.30
0.30
0.20
0.20

Expected Return
0.12
0.11
0.10
0.13

Answer 15

11.65%

Question 16

degree to which two variables move together relative to their individual mean values over time. It also provides an absolute measure of how they moved together over time.

Answer 16

Covariance

Question 17

standardized the covariance measure

Answer 17

Correlation

Question 18

Simplified and made the Markowitz’ Modern Portfolio theory more practical

Answer 18

CAPM

Question 19

CAPM who proposed

Answer 19

W.F. Sharpe

Question 20

Tells us how financial market price securities and determine expected returns on capital investment

Answer 20

CAPM

Question 21

uncontrollable or systematic risk. Risk that are result of external forces or those not within the control of the company.

Answer 21

Non-Diversifiable Risk

Question 22

controllable or unsystematic risk. Theses are risks that can be controlled through diversification

Answer 22

Diversifiable Risk

Question 23

Proposed by Stephen Ross

Answer 23

Arbitrage Pricing Theory

Question 24

States that the expected return of security is the linear function from the complex economic factors common to all securities

Answer 24

Arbitrage Pricing Theory

Question 25

Proposed by Eugene Fama

Answer 25

Market Efficiency Theory

Question 26

This means that the price which an investor is paying for financial asset fully reflects fair or true information about the intrinsic value of this specific asset or fairly describe the value of the company

Answer 26

Market Efficiency Theory

Question 27

stock market reflect past data

Answer 27

Weak form of Efficiency

Question 28

all publicly available information is presumed to be reflected in stocks’ prices

Answer 28

Semi strong form of efficiency

Question 29

asserts that stock prices fully reflect all information

Answer 29

Strong form of efficiency