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Portfolio Theory Quiz

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Questions and Answers

What is a basic assumption of portfolio theory?

Investors want to maximize returns for a given level of risk (correct)

Investors are indifferent to returns for a given level of risk

Investors want to minimize returns for a given level of risk

Investors want to maximize risk for a given level of returns

What should a portfolio include according to the assumptions of portfolio theory?

Only marketable securities and real estate

Only marketable securities

Only marketable securities and precious metals

All assets and liabilities (correct)

Why should the full spectrum of investments be considered in a portfolio?

Because it's a common industry practice

Because the returns from all investments interact (correct)

Because it's easier to manage

Because it's a regulatory requirement

What is a key characteristic of a good portfolio as per portfolio theory?

Not simply a collection of individually good investments Signup and view all the answers

What do investors aim to do in terms of risk and returns according to portfolio theory?

Maximize returns for a given level of risk Signup and view all the answers

Why do investors purchase various types of insurance, according to portfolio theory?

To guard against uncertain future outlays Signup and view all the answers

What does the increase in promised yield on corporate bonds from AAA to A indicate about investors?

They require a higher rate of return to accept higher risk Signup and view all the answers

What does portfolio theory assume about investors' preference for assets with equal rates of return?

They will select the asset with the lower level of risk Signup and view all the answers

What is the evidence of risk aversion in the context of purchasing insurance?

Outlay of a known dollar value to guard against an uncertain future outlay Signup and view all the answers

What is the implication of the difference in promised yield for different grades of bonds?

Investors require a higher rate of return to accept higher risk Signup and view all the answers