Investment Management - Midterm 2

Invest more than the market weights in securities that they believe are undervalued and less than the market weights in securities which they believe are overvalued

Active Portfolio Management

Which of the following statements about risk-averse investors is most accurate? A risk averse investor: A. Seeks out the investment with minimum risk, while return is not a major consideration. B. Will take additional investment risk if sufficiently compensated for this risk. C. avoids participating in global equity markets.

B

Which of the following statements about correlation is least accurate? A. Diversification reduces risk when correlation is less than +1 B. If the correlation coefficient is 0, a zero variance portfolio can be constructed C. The lower the correlation coefficient, the greater the potential benefits from diversification.

B.

The sensitivity of an asset's return to the return on the market index

Beta

The line of possible portfolio risk and return combinations given the risk-free rate and the risk and return of a portfolio of risky assets

Capital Allocation Line

A measure of how the returns of two risky assets move in relation to each other is the:

Covariance

Investors who believe market prices are informationally efficient. They invest in an index of risky assets that serves as a proxy for the market portfolio and allocate a portion of their investable assets to a risk-free asset

Passive Investment Strategy

Which of the following asset classes has historically had the highest returns on standard deviation?

Small-Cap Stocks

Risk that remains that can not be diversified away

Systematic Risk

Risk that is eliminated by diversification

Unsystematic Risk