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APMA Module 2: Chp. 1 Modern Portfolio Theory questions well answered
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APMA Module 2: Chp. 1 Modern Portfolio Theory questions well answered
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APMA Module 2: Chp. 1 Modern PortfolioTheory
Arbitrage - correct answer ✔✔buying a security in an underpriced market & simultaneously selling the
same security in an overpriced market to profit from the difference in price between the two markets
CAPM (Capital Asset Pricing Model) - correct answer ✔✔investment model that establishes the link
between an investment's risk, as measured by its beta, and its required return; two forms: Macro &
Micro
SML (Security Market Line) - correct answer ✔✔graph showing the relationship between systematic risk
(measured by beta) and the required return for a specific investment for any given level of risk;
determined by CAPM; Micro
CML (Capital Market Line) - correct answer ✔✔graph showing the relationship between total risk
(standard deviation) and return for a portfolio of securities in which risky securities are combined with a
risk-free asset; standard deviation goes up as riskier securities are added, then required return also goes
up; Macro
Efficient Frontier - correct answer ✔✔graph that represents various combinations of securities plotted so
that a maximum expected return is shown for each incremental risk level; for any given level of risk there
is an optimal return
Optimal Portfolio - correct answer ✔✔portfolio that maximizes an investor's expected return consistent
with that investor's given level of risk
Modern Portfolio Theory - correct answer ✔✔showed how to derive the expected return and risk for a
portfolio and how to achieve an effective diversification effect; standard deviation is the measure for
portfolio risk
1952; Harry Markowitz - correct answer ✔✔In (blank), (blank) published an article that is regarded as
the first development of modern portfolio theory.
, MPT (Modern Portfolio Theory) - correct answer ✔✔(blank) made investment managers cognizant of the
importance of taking into account the entire portfolio when making investment decisions and striving to
achieve investment objectives. Risk and return are not only important, but so is how the various
investments perform relative to each other.
Mean-variance Optimization - correct answer ✔✔requires that we look at the return (mean) & standard
deviation (variance) of each asset as well as the correlation of each asset with every other asset
Perfect Financial Market - correct answer ✔✔Markowitz relied on a set of assumptions to make standard
deviation a meaningful measure of portfolio risk. The set of assumptions implies a theoretical (blank).
MPT Assumptions - correct answer ✔✔1) risk adverse
2) investment decisions based on expected risk & return
3) homogeneous expectations regarding return & risk for all investment opportunities available
4) have a common one-period investment horizon
5) free access to all info relevant to investment decision making (no insider info)
6) there are no transaction costs (or taxes)
7) capital market is perfectly competitive (cannot be manipulated)
MPT Major Trends - correct answer ✔✔1) instl investing came into its own & large pools of $$ needed to
be measured/controlled some how
2) emergence of ever-greater computing power made advanced analysis techniques possible
3) led to professionalization of investment mngt field & worldwide growth of CFA designation
Profession - correct answer ✔✔Other than the three major trends that emerged out of the beginnings of
MPT, the main trend that emerged was that investment management had evolved into a (blank).
Minimum Variance Frontier - correct answer ✔✔large parabola that traces the outside of all the
portfolio combinations that an investor could possibly choose from; theoretically includes every publicly
traded asset, as well as even non-publicly traded asset, around the world
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