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Risk Latte - Portfolio Engineering

Quiz on Portfolio Engineering
Team Latte
Jan 01, 2006

Quiz # 1

1) Two assets are combined to form a portfolio. Asset 1 has a volatility of

and
asset 2 has a volatility of

. They are correlated by

. If a fund manager
invests

in asset 1 and

then the portfolio volatility will be:

2) J Company stock has a volatility of 15% and a correlation of 0.67 with that of
    the market index (where it trades). K Company stock, which trades on the same
    index as that of J Company, has a volatility of 12% and a correlation of 0.34
    with that of the market index. If the market index has a volatility of 11% then
    the ration of J Company stock's beta with that of K Company stock's beta will be:

a) 0.46
b) 1.46
c) 2.46
d) 3.46

3) A fund manager wants to select an efficient portfolio from a set of 50 securities
(stocks). The total number of correlations that need to be estimated would be:

a) 255
b) 575
c) 1025
d) 1255

4) If

and

then the essential problem in classical portfolio theory
(the one dealing with strategic asset allocation model) reduces to:

a) Maximize:

b) Maximize:

c) Minimize:

d) Minimize:

5) If an investor is indifferent between security 1 and security 2 then he will:

a) prefer a portfolio invested equally in securities 1 and 2 to either security 1 or
         security 2;
b) prefer a portfolio invested in securities 1 and 2 in proportion to their volatilities to
         either security 1 or security 2;
c) prefer a portfolio invested in securities 1 and 2 in proportion to their sharp ratios
         to either security 1 or security 2;
d) prefer a portfolio invested in securities 1 and 2 in proportion to their returns to
         either security 1 or 2;

6) If the expected return is denoted as

and portfolio volatility as

then the preferences of an investor wishing to maximize long-run wealth
can better be described by a family of indifference curves of the form:

7) One of the above set of indifference curves represents::

a) Sharpe's criterion
b) Markowitz's criterion
c) Linter's criterion
d) Treynor's criterion

8) If the upper and lower bounds of the proportion invested in security i is specified
in a portfolio analysis problem then it becomes:

a) a basic problem;
b) a standard problem;
c) a critical problem;
d) a finite problem;

9) Market Similarity of a security or a portfolio equals:

a) the value of beta times the volatility of the market index;
b) the value of beta at the nearest point along the market line;
c) the value of Sharpe ratio at the nearest point along the market line;
d) the value of beta divided by the volatility of the market index;

10) A stock has returned 10% over the last one year and its annualized volatility is 15%.
If the risk free rate is 5% then the Sharpe ratio of the stock is:

a) 0.22
b) 0.33
c) 0.44
d) None of the above;

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