Portfolio Management - Portfolio Management Section 1

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11. A portfolio contains equal weights of two securities that have the same standard deviation. If the correlation between the returns of the two securities was to increase, the portfolio risk would most likely:

  • Option : A
  • Explanation : The standard deviation of the portfolio is directly proportional to the correlation of assets within the portfolio.
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12. The set of risky portfolio that give the highest return at each level of risk will most likely lie on the:

  • Option : B
  • Explanation : The efficient frontier is the part of the minimum variance frontier which represents the set of portfolios that will give the highest return at each risk level.
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13. The capital allocation line (CAL) dominates the efficient frontier because of the ability of the investor to:

  • Option : A
  • Explanation : With the efficient frontier we are only allowed to invest in risky assets. With the CAL this constraint is relaxed and we are also allowed to invest in the risk-free asset.
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14. Which of the following in combination with the risk-free asset forms the dominant capital allocation line?

  • Option : B
  • Explanation : The use of leverage and the combination of a risk-free asset and the optimal risky asset will dominate the efficient frontier of risky assets (the Markowitz efficient frontier).
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15. Which of the following portfolios will most likely lie at the point of tangency between the capital allocation line and the efficient frontier of risky assets?

  • Option : C
  • Explanation : The optimal risky portfolio lies at the point of tangency between the capital allocation line and the efficient frontier of risky assets.
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