Week 1

Question 1

The capital allocation line (CAL) provided by a risk-free security and N risky securities is:

Answer 1

The line tangent to the efficient frontier of risky securities drawn from the risk-free rate.

Question 2

Which of the following statements about the minimum-variance portfolio of all risky securities is valid? (Assume short sales are allowed).

Answer 2

Its variance must be lower than those of all other securities or portfolios.

Question 3

When a distribution is positively skewed,

Answer 3

its standard deviation overestimates risk.

Question 4

In a return-standard deviation space, which of the following statements is (are) true for risk-averse investors?

1. An investor’s own indifference curves might intersect.
2. In a set of indifference curves, the highest offers the greatest utility.

Answer 4

Only statement 2 is true.

Question 5

1. What is NOT an empirical implementation challenge of the Markowitz
   Portfolio Selection Model?

A) Computationally heavy: The estimation of many parameters.
B) Estimation errors: The estimation of a large variance-covariance matrix.
C) Restrictive assumptions: It is difficult to find a proxy for the risk-free rate.

Answer 5

C) Restrictive assumptions: It is difficult to find a proxy for the risk-free rate.