1
apma module 2 Questions with Answers (100% Correct
Answers)
What is modern portfolio theory (MPT)? Answer: A development by
Harry Markowitz that showed how to derive the expected return and
risk for a portfolio and how to achieve an effective diversification
effect
In Harry Markowitz' MPT model, what is the measure for portfolio
risk? Answer: Standard deviation
What is mean-variance optimization? Answer: The goal of putting
together optimal portfolios that acknowledge not only the importance
of return and risk but how the various investments perform relative to
each other. It requires looking at the return (mean) and standard
deviation (variance) of each asset, as well as the correlation with every
other asset. These investment portfolios lie on the efficient frontier.
When using this approach, investors are striving to optimize their
amount of return (mean) for any given level of risk (variance, and our
measure of risk is standard deviation). Investors are trying to take only
as much risk as necessary to achieve a given level of return.
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,2
What did Markowitz do to make standard deviation a meaningful
measure of portfolio risk? Answer: He relied on a set of assumptions
that implied a theoretical perfect financial market. Investors are trying
to obtain the optimal amount of return they can for the level of risk
they are taking.
What assumptions did Markowitz rely on to make standard deviation
a meaningful measure of portfolio risk? Answer: Investors are risk
averse, investors make investment decisions based on expected return
and risk only, investors have homogeneous expectations regarding
return and risk for all the investment opportunities available in the
market, investors have a common one-period investment horizon,
investors have free access to all information relevant to investment
decision making, there are no transaction costs, and the capital market
is perfectly competitive
Describe the assumption: Investors are risk averse Answer: Investors
prefer higher returns to lower returns given the same level of risk.
Likewise, investors prefer less risk to more risk, given the same level of
expected return.
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, 3
Describe the assumption: Investors make investment decisions based
on expected return and risk only Answer: Their utility function
(satisfaction level) is set in the dimension of expected return and risk,
with risk being measured by standard deviation
Describe the assumption: Investors have homogenous expectations
regarding return and risk for all the investment opportunities available
in the market Answer: The investment opportunity, set in the
dimension of risk and return, is identical for all investors. Thus, an
investor's investment choice depends on his or her indifference curve,
which reflects the risk/return trade-off of that investor
Describe the assumption: Investors have a common one-period
investment horizon Answer: The period can cover any length of time.
For example, it can be as short as a day or as long as a year. An
investor tries to make an optimal investment decision to maximize
expected utility. While investors prefer more wealth to less wealth, the
utility increases at a diminishing rate as wealth increases.
Describe the assumption: Investors have free access to all information
relevant to investment decision making Answer: Thus, there is no
privileged access to inside information
© 2025 All rights reserved
apma module 2 Questions with Answers (100% Correct
Answers)
What is modern portfolio theory (MPT)? Answer: A development by
Harry Markowitz that showed how to derive the expected return and
risk for a portfolio and how to achieve an effective diversification
effect
In Harry Markowitz' MPT model, what is the measure for portfolio
risk? Answer: Standard deviation
What is mean-variance optimization? Answer: The goal of putting
together optimal portfolios that acknowledge not only the importance
of return and risk but how the various investments perform relative to
each other. It requires looking at the return (mean) and standard
deviation (variance) of each asset, as well as the correlation with every
other asset. These investment portfolios lie on the efficient frontier.
When using this approach, investors are striving to optimize their
amount of return (mean) for any given level of risk (variance, and our
measure of risk is standard deviation). Investors are trying to take only
as much risk as necessary to achieve a given level of return.
© 2025 All rights reserved
,2
What did Markowitz do to make standard deviation a meaningful
measure of portfolio risk? Answer: He relied on a set of assumptions
that implied a theoretical perfect financial market. Investors are trying
to obtain the optimal amount of return they can for the level of risk
they are taking.
What assumptions did Markowitz rely on to make standard deviation
a meaningful measure of portfolio risk? Answer: Investors are risk
averse, investors make investment decisions based on expected return
and risk only, investors have homogeneous expectations regarding
return and risk for all the investment opportunities available in the
market, investors have a common one-period investment horizon,
investors have free access to all information relevant to investment
decision making, there are no transaction costs, and the capital market
is perfectly competitive
Describe the assumption: Investors are risk averse Answer: Investors
prefer higher returns to lower returns given the same level of risk.
Likewise, investors prefer less risk to more risk, given the same level of
expected return.
© 2025 All rights reserved
, 3
Describe the assumption: Investors make investment decisions based
on expected return and risk only Answer: Their utility function
(satisfaction level) is set in the dimension of expected return and risk,
with risk being measured by standard deviation
Describe the assumption: Investors have homogenous expectations
regarding return and risk for all the investment opportunities available
in the market Answer: The investment opportunity, set in the
dimension of risk and return, is identical for all investors. Thus, an
investor's investment choice depends on his or her indifference curve,
which reflects the risk/return trade-off of that investor
Describe the assumption: Investors have a common one-period
investment horizon Answer: The period can cover any length of time.
For example, it can be as short as a day or as long as a year. An
investor tries to make an optimal investment decision to maximize
expected utility. While investors prefer more wealth to less wealth, the
utility increases at a diminishing rate as wealth increases.
Describe the assumption: Investors have free access to all information
relevant to investment decision making Answer: Thus, there is no
privileged access to inside information
© 2025 All rights reserved
