CHAPTER 7 An Introduction to Portfolio
Management
TRUE
1. Risk means the uncertainty of the future
outcomes
2. One of the several assumptions regarding
investor behavior is Investors estimate the
risk of the portfolio on the basic of the
variability of expected returns.
3. One of the best-known measures of risk is
the variance, or standard deviation of
expected returns.
4. The measures of risk assume that the
investors want to minimize the damage from
returns less than some target rate.
5. The measure of the degree to which two
variables move together relative to their
individual mean values overtime is called
Covariance.
6. Covariance has 2 types positive and
negative.
7. The potential source of error that arises from
these approximations is referred to as
estimation risk.
8. It is important to keep in mind that the
results of the portfolio asset allocation
depend in the accuracy of the statistical
inputs.
9. Two investors will choose the same
portfolio from the efficient set only if their
utility curves are identical
10. The optimal portfolio is the efficient
portfolio that has the highest utility for a
given investor.
FALSE
1. Investors are basically risk averse, meaning
that given a choice one asset with equal rate
of return.
2. The basic portfolio model was developed by
Henry Markowitz
3. The measure that only considers deviation
below the mean is variance.
4. The alternative definition of risk might be
the improbability of an adverse outcome.
5. The Magnitude of the covariance is not
depends on the variances of the individual
return series, as well as on the relationship
between the series.
6. Covariance and correlation covariance is not
affected by the variability of the two
individual return indexes.
7. The number of correlation estimates cannot
be significant.
8. A demonstration of what occurs with a
three-asset portfolio is not useful because it
shows the dynamics of the portfolio process
when assets are added.
9. Utility curves do not determine which
particular portfolio on the efficient frontier
best suits an individual investor.
10. All portfolios on the efficient frontier can
dominate any other portfolio on the efficient
frontier.