Portfolio Theory Concepts

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Questions and Answers

Which portfolios are unattainable?

Portfolios that maximize returns

Portfolios on the efficient frontier

Portfolios in the risk-free rate

Portfolios not on the efficient frontier (correct)

Market prices, under efficient market conditions, reflect which types of risk?

Only unsystematic risk

Only systematic risk (correct)

Both systematic and unsystematic risk

Neither systematic nor unsystematic risk

What does the positive minimum risk portfolio of any security indicate about its market security price?

It is equal to the original price

It is equal to the sum of stocks

It is less than the original price

It is greater than the original price (correct)

According to modern portfolio theory, what characterizes efficient portfolios?

They embody the minimum risk for given levels of expected return Signup and view all the answers

What does the negative minimum risk portfolio indicate about its market security price?

It is less than the original price Signup and view all the answers

What is a key characteristic of an efficient portfolio?

It balances risk and return optimally Signup and view all the answers

Which of the following is NOT true about systematic risk?

It can be diversified away in a portfolio Signup and view all the answers

What impact does the efficient frontier have on portfolio selection?

It separates attainable from unattainable portfolios Signup and view all the answers

What happens to expected returns if a pension fund decreases its real estate holdings?

Expected returns will generally decrease Signup and view all the answers

What is the term used for portfolios that maximize expected return for a given level of risk?

Efficient portfolios Signup and view all the answers

In modern portfolio theory, what is market risk primarily described as?

Systematic risk Signup and view all the answers

What decade did Modern Portfolio Theory begin to influence institutional portfolio management primarily?

Late 1980s Signup and view all the answers

Which statement about modern portfolio theory is false?

Leveraged assets do not impact the efficient frontier. Signup and view all the answers

Which aspect of risk does Modern Portfolio Theory primarily focus on?

Total risk and return Signup and view all the answers

When portfolio managers utilize Modern Portfolio Theory, which principle do they prioritize?

Optimizing expected return for a given risk level Signup and view all the answers

Study Notes

Portfolio Theory Concepts

Efficient Portfolios: Used for portfolios with any risk level and highlight the highest expected return.
Real Estate Portfolio Diversification: The relationship between individual asset risk and total portfolio risk depends on the correlation of returns. Adding an asset with lower risk than the average might decrease portfolio risk. Returns depend on correlation with other assets.
Market Risk (Modern Portfolio Theory): Market risk is inherent in the entire system and cannot be diversified away. It's system-wide.
Modern Portfolio Theory (MPT): MPT is the dominant strategy for institutional portfolio managers. It's not a new theory, and is not based on departures from current portfolio practices.
Efficient Frontier and Portfolio Adjustments: Adding risk-free or leveraged assets alters the efficient frontier. Portfolios not on the efficient frontier are not optimal.
Market Efficiency and Prices: In an efficient market, prices reflect both systematic and unsystematic risk.
Security Prices and Minimum Risk: A positive minimum-risk portfolio indicates security prices will be higher than their original price. A negative minimum risk indicates prices will be lower than original price.
Real Estate Portfolios (Large Pension Funds): Recent research suggests large pension funds may be able to reduce risk without affecting return if they adjusted their real estate holdings (potentially increasing or decreasing their holdings).
Efficient Portfolios (MPT): Efficient portfolios offer the minimum risk for a given expected return and the maximum return for a given level of risk.

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Description

This quiz explores key concepts in Portfolio Theory, including Efficient Portfolios, Real Estate Portfolio Diversification, and Modern Portfolio Theory (MPT). Understand how different assets correlate and the implications for risk and return management. Dive into the efficient frontier and learn about market efficiency and its effects on prices.