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CA Final Modern Portfolio Theory — practice questions

Explore 73 free Modern Portfolio Theory questions in CA Final Strategicfinancialmanagement. Open each question or exercise to read its content, reference answers and available explanation.

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Modern Portfolio Theory questions and exercises with answers

Showing questions 1–30 of 73.

Which economist introduced modern portfolio theory in a 1952 paper?Read the answer and worked solution →Modern portfolio theory is also known by which analytical name?Read the answer and worked solution →What does modern portfolio theory try to maximise for a given level of risk?Read the answer and worked solution →In MPT, which statistic is used as the measure of an asset's risk?Read the answer and worked solution →Given equal expected returns, a risk-averse investor prefers the portfolio that isRead the answer and worked solution →Stock X returns 10% and stock Y 15%. A 60:40 mix of X and Y has an expected return ofRead the answer and worked solution →Two assets with SDs of 10% and 20% are mixed 50:50 with correlation of plus one. Portfolio SD?Read the answer and worked solution →Which correlation between two assets gives the greatest diversification benefit?Read the answer and worked solution →Four uncorrelated assets, each with variance 0.04, are held in equal weights. What is the portfolio's standard deviation?Read the answer and worked solution →For a portfolio of risky assets, the set that gives the highest expected return for each risk level is called theRead the answer and worked solution →In the MPT risk-return plot, expected return is plotted against which measure of risk?Read the answer and worked solution →What does the two mutual fund theorem state?Read the answer and worked solution →Which security is the usual practical stand-in for the risk-free asset?Read the answer and worked solution →A risk-free asset held to maturity has what variance of returns?Read the answer and worked solution →With a risk-free asset, the new frontier is tangent to the risky frontier at the highestRead the answer and worked solution →Rf is 4%, tangency return 12%, SD 16%. On the capital allocation line, return at SD 8% isRead the answer and worked solution →Which risk is also called diversifiable, unique, unsystematic or idiosyncratic risk?Read the answer and worked solution →A security's relevant risk, per MPT, isRead the answer and worked solution →A portfolio using both long and short positions to stay uncorrelated with broad market indices is known as aRead the answer and worked solution →A common criticism is that variance treats unusually high returns asRead the answer and worked solution →Mandelbrot and Fama questioned MPT's assumption that returns follow which distribution?Read the answer and worked solution →Post-modern portfolio theory extends MPT by using risk measures that areRead the answer and worked solution →Which model extends unconstrained Markowitz optimisation by blending in investor 'views' on risk and return inputs?Read the answer and worked solution →What is Markowitz's specific procedure for solving the portfolio optimisation with extra constraints called?Read the answer and worked solution →Splitting capital equally among available investment options is described asRead the answer and worked solution →Which group objects to MPT using share price swings as a risk proxy?Read the answer and worked solution →MPT is criticised because its risk and return inputs are estimated fromRead the answer and worked solution →Applying MPT to a set of projects differs from stocks mainly because projects areRead the answer and worked solution →Which Italian mathematician published a mean-variance analysis method in 1940 in the context of reinsurance?Read the answer and worked solution →What is the beta of the market as a whole, by definition?Read the answer and worked solution →

Worked practice questions

Which economist introduced modern portfolio theory in a 1952 paper?

  1. Harry Markowitz
  2. Eugene Fama
  3. Franco Modigliani
  4. Robert Merton
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Correct answer: A. Harry Markowitz

Harry Markowitz published the 1952 paper that founded mean-variance portfolio selection and later shared a Nobel Prize for it.

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Modern portfolio theory is also known by which analytical name?

  1. Event-study analysis
  2. Mean-variance analysis
  3. Break-even analysis
  4. Ratio-trend analysis
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Correct answer: B. Mean-variance analysis

MPT compares the mean (expected) return with the variance of return, so it is called mean-variance analysis.

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What does modern portfolio theory try to maximise for a given level of risk?

  1. Dividend payout
  2. Brokerage income
  3. Expected return
  4. Trading volume
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Correct answer: C. Expected return

The framework assembles assets so that expected return is as high as possible at a chosen risk level.

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