Dr.

Kiseok Nam

Sawyer Business School

Suffolk University

Sample Questions for Portfolio Analysis

1. Which one of the following is a collection of possible risk-return combinations available from
portfolios consisting of individual assets?
A) minimum variance set
C) financial frontier
B) efficient portfolio
D) investment opportunity set
2. An efficient portfolio is a portfolio that does which one of the following?
A) offers the highest return for the lowest possible cost
B) provides an evenly weighted portfolio of diverse assets
C) eliminates all risk while providing an expected positive rate of return
D) lies on the vertical axis when graphing expected returns against standard deviation
E) offers the highest return for a given level of risk
3. Which one of the following is the locus of portfolios that provides the maximum return for a given
standard deviation?
A) minimum variance portfolio
C) correlated market frontier
B) efficient frontier
D) diversified portfolio line
4. You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a
normal economy. If the probability of a booming economy decreases, your expected return will:
A) decrease.
C) increase.
B) remain constant.
D) either remain constant or increase.
5. Where does the minimum variance portfolio lie in respect to the investment opportunity set?
A) lowest point
C) highest point
B) most leftward point
D) most rightward point
6. Which one of the following statements about efficient portfolios is correct?
A) Any efficient portfolio will lie below the minimum variance portfolio when the expected portfolio
return is plotted against the portfolio standard deviation.
B) An efficient portfolio will have the lowest standard deviation of any portfolio consisting of the
same two securities.
C) There are multiple efficient portfolios that can be constructed using the same two securities.
D) Any portfolio mix consisting of only two securities will be an efficient portfolio.
E) There is only one efficient portfolio that can be constructed using two securities.
7. You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio
consisting of two securities. Which one of the following statements is correct regarding this graph?
A) Risk-taking investors should select the minimum variance portfolio.
B) Risk-averse investors should select the portfolio with the lowest rate of return.
C) Some portfolios will be efficient while others will not.
D) The minimum variance portfolio will have the lowest portfolio expected return of any of the
possible portfolios.
E) All possible portfolios will graph as efficient portfolios.

Dr. Kiseok Nam

Sawyer Business School

Suffolk University

8. You are graphing the investment opportunity set for a portfolio of two securities with the expected
return on the vertical axis and the standard deviation on the horizontal axis. If the correlation
coefficient of the two securities is +1, the opportunity set will appear as ________.
A) conical shape
C) hyperbole
B) linear with an upward slope
D) horizontal line
9. A portfolio that belongs to the efficient portfolios will have which one of the following
characteristics? Assume the portfolios are comprised of five individual securities.
A) the lowest return for any given level of risk
B) the largest number of potential portfolios that can achieve a specific rate of return
C) the largest number of potential portfolios that can achieve a specific level of risk
D) a positive rate of return and a zero standard deviation
E) the lowest risk for any given rate of return
E (rP ) r f

P
10. The formula
A) Sharpe ratio
B) Treynor measure

is used to calculate the _____________.

C) Coefficient of variation
D) Real rate of return

11. For purposes of maximum portfolio diversification, which for the following would provide the
greatest diversification?
A) Security A with a correlation coefficient of -0.0
B) Security B with a correlation coefficient of 0.0
C) Security C with a correlation coefficient of -0.50
D) Security D with a correlation coefficient of 0.50
12. The primary benefit of diversification is:
A) an increase in expected return.
B) a reduction in risk.

C) an equal reduction in risk and return.

D) diversification has no real benefit.

13. The type of risk that can be diversified away is called ________.
A) unsystematic risk
C) systematic risk
B) nondiversifiable risk
D) system-wide risk
14. Unsystematic risk
A) is also known as nondiversifiable risk.
B) is system-wide risk.

C) can be diversified away.

D) is equal to 2 times the systematic risk.

15. ________ is risk that cannot be diversified away.

A) Unsystematic risk
B) Firm-specific risk

C) Systematic risk
D) Diversifiable risk

16. The terms ________ and ________ mean the same thing.
A) nondiversifiable risk, unsystematic risk
C) diversifiable risk, systematic risk
B) diversifiable risk, unsystematic risk
D) total risk, unique risk
2

Dr. Kiseok Nam

Sawyer Business School

17. The measure of systematic risk is called ________.

A) correlation
B) covariance
C) variance

Suffolk University

D) beta

18. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were
paying 4.5%. This portfolio had a Sharpe ratio of ____.
A) 0.22
B) 0.60
C) 0.42
D) 0.25
19. You combine a set of assets using different weights such that you produce the following results.

Which one of these portfolios CANNOT be a Markowitz efficient portfolio?

A) A
B) B
C) C
D) D

E) E

20. What is the expected return on this stock given the following information?

A) -8.07%
B) -7.69%
E(R) = (.40 16) + (.60 -22) = -6.80%

C) -6.80%

D) -5.70%

E) -5.22%

21. The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the following
information?

A) 5.88%
B) 5.95%
E(R) = (.35 14) + (.65 8) = 10.10

C) 6.10%
D) 6.23%
Risk premium = 10.10 - 4.15 = 5.95 percent

22. What is the variance of the expected returns on this stock?

A) 1.21

B) 1.56
C) 3.84
E(R) = (.40 15) + (.60 19) = 17.4
Var = .40(15 - 17.4)2 + .60(19 - 17.4)2 = 3.84
3

D) 4.03

Dr. Kiseok Nam

Sawyer Business School

Suffolk University

Dr. Kiseok Nam

Sawyer Business School

Suffolk University

23. What is the standard deviation of the returns on this stock?

A) 3.33%

B) 4.62%
C) 5.01%
E(R) = (.27 6) + (.73 19) = 15.49
Var = .27(6 - 15.49)2 + .73(19 - 15.49)2 = 33.31
Std Dev = 33.31 = 5.77 percent

D) 5.77%

24. A portfolio consists of the following securities. What is the portfolio weight of stock B?

A) 0.226

B) 0.239
C) 0.245
D) 0.257
WB = (150 $33)/[(200 $48) + (150 $33) + (350 $21)] = .2260

25. Travis has a portfolio consisting of two stocks, A and B, which is valued at $53,800. Stock A is worth
$23,900. What is the portfolio weight of stock B?
A) 0.528
B) 0.543
C) 0.551
D) 0.556
WB = ($53,800 - $23,900)/$53,800 = .5558
26. You have a portfolio which is comprised of 60 percent of stock A and 40 percent of stock B. What is
the expected rate of return on this portfolio?

A) 12.76%

B) 12.98%
C) 13.44%
D) 13.85%
E(RP-Boom) = .60(15%) + .40(9%) = 12.6%
E(RP-Normal) = .60(8%) + .40(20%) = 12.8%
E(RP-Portfolio) = (.20)(12.6%) + (.80)(12.8%) = 12.76%

27. You have a portfolio which is comprised of 55 percent of stock A and 45 percent of stock B. What is
the expected rate of return on this portfolio?

A) 9.67%

B) 9.88%
C) 10.03%
E(RP-Boom) = (.55 22) + (.45 14) = 18.4
E(RP-Normal) = (.55 14) + (.45 8) = 11.3
E(RP-Recession) = (.55 -10) + (.45 5) = -3.25
5

D) 11.79%

Dr. Kiseok Nam

Sawyer Business School

Suffolk University

E(RP-Portfolio) = (.18 18.4) + (.62 11.3) + (.20 -3.25) = 9.67%

28. You have a portfolio which is comprised of 72% of stock A and 28% of stock B. What is the variance
of this portfolio?

A) 203.8

B) 268.1
C) 290.9
D) 306.9
E(RP-Boom) = (.72 12%) + (.28 22%) = 14.8%
E(RP-Normal) = (.72 -12%) + (.28 -44%) = -20.96%
E(RP-Portfolio) = (.60 14.8) + (.40 -20.96) = 0.50%
Var(Portfolio) = .60(14.8 - .50)2 + .40(-21.0 - .50)2 = 306.91

29. Roger has a portfolio comprised of $8,000 of stock A and $12,000 of stock B. What is the standard
deviation of this portfolio?

A) 4.67%

B) 9.97%

C) 7.23%

D) 8.83%

30. Stock A has a standard deviation of 15% per year and stock B has a standard deviation of 8% per
year. The correlation between stock A and stock B is .40. You have a portfolio of these two stocks
wherein stock B has a portfolio weight of 40%. What is your portfolio variance?
A) 0.01143
B) 0.01214
C) 0.01329
D) 0.01437
Var_Port = [(1 - .40)2 .152] + [.402 .082] + [2 (1 - .40) .40 .15 .08 .40] = .011428
31. Stock A has a standard deviation of 15% per year and stock B has a standard deviation of 21% per
year. The correlation between stock A and stock B is .30. You have a portfolio of these two stocks
wherein stock B has a portfolio weight of 60%. What is your portfolio standard deviation?
A) 14.87%
B) 15.50%
C) 16.91%
D) 17.45%
Var_Port = [(1 - .60)2 .152] + [.602 .212] + [2 (1 - .60) .60 .15 .21 .30] = .024314
Std Dev_Port = .024012 = 15.50%
32. A stock fund has a standard deviation of 17% and a bond fund has a standard deviation of 8%. The
correlation of the two funds is .24. What is the approximate weight of the stock fund in the minimum
variance portfolio?
A) 11%
B) 15%
C) 21%
D) 24%

Dr. Kiseok Nam

Sawyer Business School

Suffolk University

33. The standard deviation of return on investment A is .10, while the standard deviation of return on
investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient
between the returns on A and B is _________.
A) 0.12
B) 0.36
C) 0.60
D) 0.77
Corr = 0.0030/(0.1)(0.05)=0.60
34. The standard deviation of return on investment A is .10, while the standard deviation of return on
investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the
covariance of returns on A and B is _________.
A) -0.0447
B) -0.0020
C) 0.0020
D) 0.0447
Cov = -(0.5)(0.1)(0.04)=-0.0020
35. An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of
return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient
between the returns on A and B is 0%. The expected return on the minimum-variance portfolio is
approximately _________.
A) 10%
B) 13.6%
C) 15%
D) 19.41%

36. An investor can design a risky portfolio based on stocks A & B. The standard deviation of return is
20% for stock A and 15% for stock B. The correlation coefficient between the returns on A and B is 0.
Compute the standard deviation of return on the minimum-variance portfolio.
A) 0%
B) 6%
C) 12%
D) 17%