NISM Series X-A Chapter 13: Overview of Alternative Investment Funds Practice Questions

Question 1

Who authored the article "Portfolio Selection" in 1952, which introduced ideas that form the foundations of Modern Portfolio Theory (MPT)?

Accepted Answer

Harry Markowitz. The text states, "In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz. Decades later in 1990, Harry Markowitz was honoured with the Nobel Prize in Economics for his portfolio theory."

Question 2

According to the MPT framework for constructing and selecting a portfolio, which of the following is NOT listed as a required input for the portfolio manager to estimate?

Accepted Answer

The historical performance of the overall market index.. The text lists three required estimations: '1. the expected return of every asset class... 2. the standard deviation of each asset’s expected returns 3. the correlation coefficient among the entire set of asset class...'. Historical market performance is not explicitly listed as one of these three required inputs

Question 3

For a portfolio consisting of 50 investments, how many weighted covariance terms would be present in the portfolio variance formula, according to Modern Portfolio Theory?

Accepted Answer

1225. The text states the formula for the number of covariance terms is (n^2 - n) / 2. For n = 50, the number of covariance terms = (50^2 - 50) / 2 = (2500 - 50) / 2 = 2450 / 2 = 1225

Question 4

Based on the provided data for a portfolio, what is the Expected Return of the Portfolio?

Portfolio Constituents | Weights (% of Portfolio) | Expected Investment Return
A | 0.2 | 0.09
B | 0.1 | 0.12
C | 0.3 | 0.15
D | 0.4 | 0.18

Accepted Answer

0.147. The Expected Return of a Portfolio is the weighted average of the expected rates of return for the individual investments.
Weighted investment Return for A = 0.2 * 0.09 = 0.018
Weighted investment Return for B = 0.1 * 0.12 = 0.012
Weighted investment Return for C = 0.3 * 0.15 = 0.045
Weighted investment Return for D = 0.4 * 0.18 = 0.072
Expected Return of a Portfolio = 0.018 + 0.012 + 0.045 + 0.072 = 0.147. This matches the example provided in the text

Question 5

Which of the following is NOT an assumption of Modern Portfolio Theory (MPT)?

Accepted Answer

Investors base decisions on expected return, risk, and personal biases from recent market performance.. The text lists assumptions in section 14.2. Options A, B, and C are explicitly stated assumptions. Option D is incorrect because the text states, 'Investors base decisions solely on expected return and risk, so their utility curves are a function of expected return and the expected variance (or standard deviation) of returns only,' implying no consideration for personal biases from recent market performance

Question 6

For a portfolio consisting of 50 securities, how many weighted covariance terms would be involved in the calculation of the portfolio variance?

Accepted Answer

1225. The number of covariance terms is arrived at by using the formula: (n^2 - n) / 2, where n is the number of securities in the portfolio. For n = 50:
Number of covariance terms = (50^2 - 50) / 2 = (2500 - 50) / 2 = 2450 / 2 = 1225

Question 7

A portfolio consists of four securities with the following weights and expected returns:

Portfolio Constituents | Weights (% of Portfolio) | Expected Investment Return
---|---|---
A | 0.2 | 0.09
B | 0.1 | 0.12
C | 0.3 | 0.15
D | 0.4 | 0.18

What is the expected return of this portfolio?

Accepted Answer

0.147. The expected rate of return for a portfolio is the weighted average of the expected rates of return for the individual investments.
Expected Return = (0.2 * 0.09) + (0.1 * 0.12) + (0.3 * 0.15) + (0.4 * 0.18)
Expected Return = 0.018 + 0.012 + 0.045 + 0.072
Expected Return = 0.147

Question 8

Which of the following statements regarding the asset allocation decision is most accurate, according to the provided text?

Accepted Answer

It majorly influences the long-run performance of investment portfolios.. Section 15.1 'Importance of Asset Allocation Decision' states, 'Professional Investment experience has been suggesting that in the long run asset-allocation decision majorly influences the performance of investment portfolios.'

Question 9

For a portfolio consisting of 50 individual investments, how many weighted covariance terms would be required to calculate the portfolio variance?

Accepted Answer

1225. The text provides the formula for the number of covariance terms as (n²-n)/2, where n is the number of securities. For n=50, the calculation is (50² - 50) / 2 = (2500 - 50) / 2 = 2450 / 2 = 1225

Question 10

Prior to 1950, the investing community was familiar with the benefits of holding a diversified portfolio but lacked the means to:

Accepted Answer

Quantify the benefits of diversification.. The text states: 'Prior to 1950, investing community was familiar with the benefits of holding a diversified portfolio. However, they had no way of quantifying the benefits of diversification.'

Question 11

Harry Markowitz was honored with the Nobel Prize in Economics for his portfolio theory, which was introduced in an article titled 'Portfolio Selection'. In which year was this article published?

Accepted Answer

1952. The text states: 'In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz. Decades later in 1990, Harry Markowitz was honoured with the Nobel Prize in Economics for his portfolio theory.'

Question 12

What statistical notion did Harry Markowitz introduce to quantify the concept of diversification?

Accepted Answer

Covariance or correlation between investment assets.. The text states, 'MPT quantified the concept of diversification by introducing the statistical notion of covariance, or correlation between investment assets.'

Question 13

According to Modern Portfolio Theory, which of the following best describes a risk-averse investor?

Accepted Answer

An investor who rejects a fair game and demands a greater risk premium for bearing greater risk.. The text states, 'Risk averse investors reject fair game. Risk averse investors will invest in risk-free investment opportunities or in investment opportunities with positive expected risk premium. The greater the risk, greater the demand for risk premium.' Option A describes a risk-neutral investor, Option B describes a risk-seeking investor, and Option D describes a characteristic of a risk-neutral investor

Question 14

What statistical notion did Harry Markowitz introduce to quantify the concept of diversification within Modern Portfolio Theory (MPT)?

Accepted Answer

Covariance or Correlation. The text states, 'MPT quantified the concept of diversification by introducing the statistical notion of covariance, or correlation between investment assets.'

Question 15

Which of the following is an assumption of Modern Portfolio Theory (MPT)?

Accepted Answer

Investors maximize one-period expected utility and assign utility scores to portfolio choices.. The text states, 'Investors maximize one-period expected utility. Investors choose an action or event with the maximum expected utility. Investors assign utility scores to the various portfolio choices available to them.' Option A describes risk-seeking investors, not a general MPT assumption. Option C contradicts the MPT assumption that decisions are based solely on expected return and risk. Option D contradicts the MPT assumption that utility curves demonstrate diminishing marginal utility of wealth

Question 16

Which individual was honored with the Nobel Prize in Economics for his portfolio theory, based on an article published in 1952?

Accepted Answer

Harry Markowitz. The text states, 'In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz. Decades later in 1990, Harry Markowitz was honoured with the Nobel Prize in Economics for his portfolio theory.'

Question 17

Who authored the article 'Portfolio Selection' in 1952, which laid the foundations for Modern Portfolio Theory (MPT)?

Accepted Answer

Harry Markowitz. The text states, 'In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz.'

Question 18

Which of the following is NOT an assumption of Modern Portfolio Theory (MPT)?

Accepted Answer

Utility curves demonstrate increasing marginal utility of wealth.. The text states, "Utility curves demonstrate diminishing marginal utility of wealth." Therefore, 'increasing marginal utility of wealth' is not an assumption of MPT

Question 19

According to Modern Portfolio Theory, a risk-neutral investor evaluates investment opportunities primarily based on:

Accepted Answer

Expected return, with no regard to the amount of risk.. The text states, "A risk neutral investor on the other hand evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person."

Question 20

An investor who evaluates investment opportunities solely on the basis of expected return, with no regard to risk, and for whom the portfolio Certainty Equivalent Rate (CER) is equal to the expected rate of return on the risky portfolio, is best described as a:

Accepted Answer

Risk-neutral investor. The text defines a risk-neutral investor as one who "evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person. Risk neutral person provide no penalty for risk. For risk neutral investor, portfolio CER is expected rate of return on the risky portfolio."

Question 21

According to Modern Portfolio Theory (MPT) principles, which statement accurately describes a risk neutral investor?

Accepted Answer

A risk neutral investor evaluates investment opportunities solely on the basis of expected return, with no regard to risk.. The text states, "A risk neutral investor on the other hand evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person. Risk neutral person provide no penalty for risk."

Question 22

Which type of investor evaluates investment opportunities solely on the basis of expected return, with no regard to risk, and provides no penalty for risk?

Accepted Answer

Risk-neutral investor. The text defines a risk neutral investor as 'the one who on the other hand evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person. Risk neutral person provide no penalty for risk.'

Question 23

Based on the provided scenario in the chapter, what is the expected return for Stock B?

Accepted Answer

17.7%. The expected return for Stock B (RB) is calculated as the sum of potential returns multiplied by their corresponding probabilities:
RB = (0.3 * 25%) + (0.5 * 20%) + (0.2 * 1%)
RB = 7.5% + 10% + 0.2%
RB = 17.7%
This calculation is explicitly shown in the chapter text

Question 24

Which type of investor will reject a 'fair game' as defined in Modern Portfolio Theory?

Accepted Answer

Risk-averse investor. The text states: 'A prospect that has a zero risk premium is called a fair game. Risk averse investors reject fair game.'

Question 25

According to Modern Portfolio Theory, what happens to the benefit of diversification when two assets have a perfect positive correlation between their returns?

Accepted Answer

There is no benefit of diversification.. The text explicitly states: "In other words, there is no benefit of diversification when two assets are having perfect positive correlation between them."

Question 26

Who authored the article 'Portfolio Selection' in 1952, which laid the foundation for Modern Portfolio Theory (MPT)?

Accepted Answer

Harry Markowitz. The text states: 'In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz.'

Question 27

According to Modern Portfolio Theory (MPT), which of the following statements accurately describes an investor's preference regarding risk and return?

Accepted Answer

Investors want to maximize the return for a given level of risk, or equivalently, minimize risk for a given level of return.. The text states, "An investor wants to maximize the return for a given level of risk. That means given a choice between two assets with equal rate of return, investors will select the asset with lower risk." It also mentions, "Investors base decisions solely on expected return and risk, so their utility curves are a function of expected return and the expected variance (or standard deviation) of returns only."

Question 28

According to the Modern Portfolio Theory, which type of investor will reject a 'fair game' and demand a positive expected risk premium for bearing risk?

Accepted Answer

Risk averse investor. The text states: 'Risk averse investors reject fair game. Risk averse investors will invest in risk-free investment opportunities or in investment opportunities with positive expected risk premium.'

Question 29

According to the text, which of the following statements best describes the asset allocation decision?

Accepted Answer

It is the process of deciding how to distribute an investor’s wealth into different asset classes.. The text states: 'Asset allocation is the process of deciding how to distribute an investor’s wealth into different asset classes for investment purposes.' It also highlights its importance, noting it 'majorly influences the performance of investment portfolios' in the long run, making option D incorrect

Question 30

What characteristic defines portfolios that lie on the Efficient Frontier?

Accepted Answer

They offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return.. The text states: 'It is a set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return.'

Question 31

Who is credited with authoring the article “Portfolio Selection” in 1952, which laid the foundations for Modern Portfolio Theory (MPT)?

Accepted Answer

Harry Markowitz. The text states, "In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz. ...The ideas introduced in this article have come to form the foundations of what is now popularly referred as Modern Portfolio Theory (MPT)."

Question 32

According to the text, what is considered the 'starting point' for an investor setting out to achieve their goals, and majorly influences long-run portfolio performance?

Accepted Answer

The asset allocation decision.. The text states: 'Asset allocation decision is a very important investment decision. This is the starting point for the investor as they set out to achieve their goals. Professional Investment experience has been suggesting that in the long run asset-allocation decision majorly influences the performance of investment portfolios.'

Question 33

Who is credited with introducing the ideas that form the foundations of Modern Portfolio Theory (MPT) in his 1952 article "Portfolio Selection"?

Accepted Answer

Harry Markowitz. The text states: "In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz. ... The ideas introduced in this article have come to form the foundations of what is now popularly referred as Modern Portfolio Theory (MPT)."

Question 34

Portfolios that lie to the right of the efficient frontier are considered sub-optimal because:

Accepted Answer

They have a higher risk for the given rate of return.. The text states, 'Portfolios that are to the right of the efficient frontier are sub-optimal because they have a higher risk for the given rate of return.'

Question 35

A risk neutral investor evaluates investment opportunities primarily based on which of the following criteria?

Accepted Answer

The expected return, without regard to the amount of risk involved.. The text states, "A risk neutral investor on the other hand evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person. Risk neutral person provide no penalty for risk."

Question 36

Based on the following forecast for Stock A in three possible scenarios:
Boom: Probability 0.3, Return 15%
Normal: Probability 0.5, Return 10%
Recession: Probability 0.2, Return 2%
What is the expected return of Stock A?

Accepted Answer

9.9%. As per the text's example: Expected Return (RA) = (0.3 * 15%) + (0.5 * 10%) + (0.2 * 2%) = 4.5% + 5% + 0.4% = 9.9%

Question 37

Who authored the 1952 article 'Portfolio Selection' which laid the foundation for Modern Portfolio Theory (MPT)?

Accepted Answer

Harry Markowitz. The text states, 'In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz.'

Question 38

An investor who evaluates investment opportunities solely based on expected return, with no regard for the amount of risk, is best described as a:

Accepted Answer

Risk-neutral investor. The text defines a risk-neutral investor as one who "evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person."

Question 39

An investor who evaluates investment opportunities solely on the basis of expected return, with no regard to risk, is known as a:

Accepted Answer

Risk-neutral investor. The text states: 'A risk neutral investor on the other hand evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person. Risk neutral person provide no penalty for risk.'

Question 40

For a portfolio consisting of 50 securities, how many weighted covariance terms would be required to calculate the portfolio variance?

Accepted Answer

1225. The text provides the formula for the number of covariance terms: (n^2 - n) / 2, where 'n' is the number of securities. For n = 50, the calculation is (50^2 - 50) / 2 = (2500 - 50) / 2 = 2450 / 2 = 1225

Question 41

According to the text, when two securities are perfectly correlated, what is the implication for diversification benefits?

Accepted Answer

There is no benefit of diversification.. The text states, 'In other words, there is no benefit of diversification when two assets are having perfect positive correlation between them.'

Question 42

Which of the following concepts did Harry Markowitz introduce to quantify the benefits of diversification within Modern Portfolio Theory (MPT)?

Accepted Answer

The statistical notion of covariance or correlation between investment assets.. According to the text, "MPT quantified the concept of diversification by introducing the statistical notion of covariance, or correlation between investment assets. Harry Markowitz mathematically demonstrated that the variance of the rate of return is a meaningful measure of portfolio risk."

Question 43

A portfolio consists of four securities with the following weights and expected returns:
Security A: Weight 0.2, Expected Return 0.09
Security B: Weight 0.1, Expected Return 0.12
Security C: Weight 0.3, Expected Return 0.15
Security D: Weight 0.4, Expected Return 0.18
What is the Expected Return of this portfolio?

Accepted Answer

0.147. As per the text's example:
Weighted return A = 0.2 * 0.09 = 0.018
Weighted return B = 0.1 * 0.12 = 0.012
Weighted return C = 0.3 * 0.15 = 0.045
Weighted return D = 0.4 * 0.18 = 0.072
Total Expected Return = 0.018 + 0.012 + 0.045 + 0.072 = 0.147

Question 44

One of the key assumptions of Modern Portfolio Theory (MPT) regarding investor behavior is that investors want to:

Accepted Answer

Maximize the return for a given level of risk.. The text lists as an assumption: 'An investor wants to maximize the return for a given level of risk. That means given a choice between two assets with equal rate of return, investors will select the asset with lower risk.'

Question 45

If a portfolio consists of 50 investments, how many weighted covariance terms would be present in the portfolio variance formula?

Accepted Answer

1225. The text provides the formula for the number of covariance terms: (n^2 - n) / 2, where n is the number of securities.
For n = 50, the number of covariance terms = (50^2 - 50) / 2 = (2500 - 50) / 2 = 2450 / 2 = 1225. This is also directly stated as an example in the text

Question 46

Which of the following best describes the 'Efficient Frontier' in the context of Modern Portfolio Theory?

Accepted Answer

A set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return.. The text defines the Efficient Frontier as 'a set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return.'

Question 47

Who is credited with introducing the ideas that form the foundations of Modern Portfolio Theory (MPT) in his 1952 article "Portfolio Selection"?

Accepted Answer

Harry Markowitz. The text states, "In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz. ... The ideas introduced in this article have come to form the foundations of what is now popularly referred as Modern Portfolio Theory (MPT)."

Question 48

The 'Efficient Frontier' in Modern Portfolio Theory represents:

Accepted Answer

A set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return.. The text defines the Efficient Frontier as 'a set of optimal portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return.'

Question 49

Who is credited with introducing Modern Portfolio Theory (MPT) and quantifying the concept of diversification?

Accepted Answer

Harry Markowitz. The text states, 'In 1952 The Journal of Finance published an article titled “Portfolio Selection”, authored by Harry Markowitz. Decades later in 1990, Harry Markowitz was honoured with the Nobel Prize in Economics for his portfolio theory.'

Question 50

How does a risk neutral investor evaluate investment opportunities, according to the text?

Accepted Answer

Solely on the basis of expected return with no regard to risk.. The text states, 'A risk neutral investor on the other hand evaluates the investment opportunities solely on the basis of expected return with no regard to risk. The amount of risk is irrelevant to the risk neutral person.'

Ch.13: Overview of Alternative Investment Funds

What You Will Learn in This Chapter

Multiple Choice Questions (125)

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