CAPM TEST QUESTIONS AND ANSWERS
ALL CORRECT
True or False:
We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio
that is better in terms of both expected return and volatility. - Answer- FALSE
True or False:
We can rule out inefficient portfolios because they represent inferior investment choices.
- Answer- TRUE
True or False:
Correlation has no effect on the expected return on a portfolio. - Answer- TRUE
True or False:
The volatility of the portfolio will differ, depending on the correlation between the
securities in the portfolio. - Answer- TRUE
True or False:
Efficient portfolios can be easily ranked, because investors will choose from among
them those with the highest expected returns. - Answer- FALSE
True or False:
When the correlation between securities is less than 1, the volatility of the portfolio is
reduced due to diversification. - Answer- TRUE
True or False:
When stocks are perfectly positively correlated, the set of portfolios is identified
graphically by a straight line between them. - Answer- TRUE
True or False:
An investor seeking high returns and low volatility should only invest in an efficient
portfolio. - Answer- TRUE
True or False:
Graphically, the efficient portfolios are those on the northeast edge of the set of possible
portfolios, an area which we call the efficient frontier. - Answer- FALSE
True or False:
We say a portfolio is short those stocks that have negative portfolio weights. - Answer-
TRUE
ALL CORRECT
True or False:
We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio
that is better in terms of both expected return and volatility. - Answer- FALSE
True or False:
We can rule out inefficient portfolios because they represent inferior investment choices.
- Answer- TRUE
True or False:
Correlation has no effect on the expected return on a portfolio. - Answer- TRUE
True or False:
The volatility of the portfolio will differ, depending on the correlation between the
securities in the portfolio. - Answer- TRUE
True or False:
Efficient portfolios can be easily ranked, because investors will choose from among
them those with the highest expected returns. - Answer- FALSE
True or False:
When the correlation between securities is less than 1, the volatility of the portfolio is
reduced due to diversification. - Answer- TRUE
True or False:
When stocks are perfectly positively correlated, the set of portfolios is identified
graphically by a straight line between them. - Answer- TRUE
True or False:
An investor seeking high returns and low volatility should only invest in an efficient
portfolio. - Answer- TRUE
True or False:
Graphically, the efficient portfolios are those on the northeast edge of the set of possible
portfolios, an area which we call the efficient frontier. - Answer- FALSE
True or False:
We say a portfolio is short those stocks that have negative portfolio weights. - Answer-
TRUE
