Portfolio Theory

Question 1

The set of portfolios on the minimum-variance frontier that dominates all sets of portfolios
below the global minimum-variance portfolio is the:
A) capital allocation line.
B) Markowitz efficient frontier.
C) set of optimal risky portfolios.

Answer 1

B) Markowitz efficient frontier.

Question 2

The line depicting the risk and return of portfolio combinations of a risk-free asset and any
risky asset is the:
A) security market line.
B) capital allocation line.
C) security characteristic line.

Answer 2

A) security market line.

Question 3

With respect to capital market theory, an investor’s optimal portfolio is the combination of
a risk-free asset and a risky asset with the highest:
A) expected return.
B) indifference curve.
C) capital allocation line slope.

Answer 3

B) indifference curve.

Question 4

The capital market line, CML, is the graph of the risk and return of portfolio combinations
consisting of the risk-free asset and:
A) any risky portfolio.
B) the market portfolio.
C) the leveraged portfolio.

Answer 4

B) the market portfolio.

Question 5

With respect to return-generating models, the intercept term of the market model is the
asset’s estimated:
A) beta.
B) alpha.
C) variance.

Answer 5

B) alpha.

Question 6

Analysts who have estimated returns of an asset to be greater than the expected returns
generated by the capital asset pricing model should consider the asset to be:
A) overvalued.
B) undervalued.
C) properly valued.

Answer 6

B) undervalued.

Question 7

In constructing a chart, using a logarithmic scale on the vertical axis is likely to be most
useful for which of the following applications?
A) The price of gold for the past 100 years
B) The share price of a company over the past month
C) Yields on 10-year U.S. Treasuries for the past five years

Answer 7

A) The price of gold for the past 100 years

Question 8

Which flow-of-funds indicator is considered bearish for equities?
A) A large increase in the number of IPOs
B) Higher-than-average cash balances in mutual funds
C) An upturn in margin debt but one that is still below the long-term average

Answer 8

A) A large increase in the number of IPOs

Question 9

Which of the following is not a momentum oscillator?
A) MACD
B) Stochastic oscillator
C) Bollinger Bands

Answer 9

C) Bollinger Bands

Question 10

Which of the following is a continuation pattern?
A) Triangle
B) Triple top
C) Head and shoulders

Answer 10

A) Triangle

Question 11

Which of the following is a reversal pattern?
A) Pennant
B) Rectangle
C) Double bottom

Answer 11

C) Double bottom

Question 12

Which of the following is generally true of the head and shoulders pattern?
A) Volume is important in interpreting the data.
B) The neckline, once breached, becomes a support level.
C) Head and shoulders patterns are generally followed by an uptrend in the security’s
price.

Answer 12

A) Volume is important in interpreting the data.

Question 13

To identify intermarket relationships, technicians commonly use:
A) stochastic oscillators.
B) fibonacci ratios.
C) relative strength analysis.

Answer 13

C) relative strength analysis.