Portfolio Theory MCQs 2026

As the number of well-chosen stocks in a portfolio increases, its total risk

1. Arises without limit✓
2. Bbecomes exactly zero✓
3. Cequals the average single-stock risk✓
4. Dapproaches the market (systematic) risk level✓

Portfolio theory assumes investors make decisions based on

1. Amarket rumors✓
2. Bpast prices only✓
3. Cexpected return and risk (variance)✓
4. Dcoupon payment dates✓

The primary benefit of holding many uncorrelated assets is

1. Ahigher management fees✓
2. Brisk reduction without necessarily sacrificing return✓
3. Ca guaranteed profit✓
4. Delimination of market risk✓

The efficient frontier is drawn in a diagram of expected return versus

1. Abeta✓
2. Btime✓
3. Crisk (standard deviation)✓
4. Ddividends✓

International diversification can reduce risk because foreign markets are

1. Aalways higher returning✓
2. Brisk-free✓
3. Cperfectly correlated with the home market✓
4. Doften imperfectly correlated with the home market✓

Home bias refers to investors' tendency to

1. Aover-invest in domestic securities✓
2. Bhold only foreign assets✓
3. Cavoid equities entirely✓
4. Dhold only cash✓

The risk that cannot be diversified away is measured by

1. Astandard deviation✓
2. Bvariance✓
3. Cthe coefficient of variation✓
4. Dbeta✓

A negative correlation between two assets means their returns tend to

1. Amove together✓
2. Bstay constant✓
3. Cmove in opposite directions✓
4. Dbe identical✓

The dominance principle implies that an investor prefers a portfolio with

1. Ahigher return for the same risk, or lower risk for the same return✓
2. Bhigher risk in all cases✓
3. Cthe largest number of assets✓
4. Dthe lowest possible return✓

Modern Portfolio Theory was pioneered by

1. AAdam Smith✓
2. BJohn Maynard Keynes✓
3. CIrving Fisher✓
4. DHarry Markowitz✓

The expected return of a portfolio is the

1. Asimple sum of individual asset returns✓
2. Bweighted average of the expected returns of its assets✓
3. Chighest asset return✓
4. Dlowest asset return✓

Diversification primarily reduces a portfolio's

1. Aunsystematic (specific) risk✓
2. Bsystematic risk✓
3. Cexpected return✓
4. Dmarket risk✓

Portfolio risk depends not only on individual variances but also on the

1. Anumber of dividends paid✓
2. Bcoupon rates✓
3. Ccovariances (correlations) between the assets✓
4. Dface values✓

Within the CAPM framework, the measure of risk for an individual asset is

1. Avariance✓
2. Bbeta✓
3. Cstandard deviation✓
4. Dcovariance with itself✓

Two assets with a correlation coefficient of positive one provide

1. Ano diversification benefit✓
2. Bmaximum diversification✓
3. Czero risk✓
4. Dnegative risk✓

The expected return on the market portfolio is generally

1. Aequal to the risk-free rate✓
2. Bzero✓
3. Chigher than the risk-free rate✓
4. Dnegative✓

The greatest diversification benefit occurs when two assets have a correlation of

1. Apositive one✓
2. Bzero✓
3. Cnegative one✓
4. Dpositive one half✓

The efficient frontier represents portfolios offering the

1. Alowest return for each level of risk✓
2. Bhighest expected return for each level of risk✓
3. Chighest risk in all cases✓
4. Dzero risk✓

A well-diversified portfolio has essentially eliminated

1. Asystematic risk✓
2. Bunsystematic risk✓
3. Cmarket risk✓
4. Dall risk✓

Rebalancing a portfolio means

1. Arestoring the original target weights after prices change✓
2. Bselling every holding✓
3. Cnever trading again✓
4. Dbuying only brand-new assets✓

Asset allocation refers to

1. Apicking individual stocks only✓
2. Btiming single trades✓
3. Cchoosing a stockbroker✓
4. Ddividing investments among asset classes such as equities, bonds and cash✓

Active portfolio management seeks to

1. Aoutperform a benchmark through selection and timing✓
2. Bexactly replicate an index✓
3. Chold only cash✓
4. Davoid all equities✓

Passive portfolio management typically involves

1. Afrequent individual stock picking✓
2. Btracking a market index✓
3. Caggressive market timing✓
4. Dshort-term day trading✓

A portfolio with a beta of 1.0 is expected to

1. Abe risk-free✓
2. Bconsistently outperform the market✓
3. Cbe uncorrelated with the market✓
4. Dmove in line with the market✓

The market risk premium is the difference between the expected market return and the

1. Ainflation rate✓
2. Bdividend yield✓
3. Crisk-free rate✓
4. Dcoupon rate✓

According to CAPM, the only risk rewarded with higher expected return is

1. Atotal risk✓
2. Bunsystematic risk✓
3. Cfirm-specific risk✓
4. Dsystematic (market) risk✓

The correlation coefficient always lies between

1. Anegative one and positive one✓
2. Bzero and one✓
3. Cnegative one hundred and positive one hundred✓
4. Done and ten✓

Covariance measures

1. Athe average return✓
2. Bthe risk-free rate✓
3. Chow two assets' returns move together✓
4. Dtotal portfolio value✓

If two assets are perfectly negatively correlated, it is theoretically possible to build a portfolio with

1. Amaximum risk✓
2. Bzero risk✓
3. Cinfinite return✓
4. Dnegative return✓

The portfolio on the efficient frontier with the lowest possible risk is the

1. Atangency portfolio✓
2. Bmarket portfolio✓
3. Czero-beta portfolio✓
4. Dglobal minimum-variance portfolio✓

The coefficient of variation measures

1. Atotal return✓
2. Bbeta✓
3. Crisk per unit of return✓
4. Dcorrelation✓

The idea that choosing the optimal risky portfolio is independent of investor risk preferences is called the

1. Aefficient market hypothesis✓
2. Bdividend irrelevance theory✓
3. Crandom walk theory✓
4. Dseparation theorem✓

Under the capital market line, the optimal risky portfolio for all investors is

1. Adifferent for every investor✓
2. Bthe same market portfolio✓
3. Cthe minimum-variance portfolio✓
4. Dthe risk-free asset✓

A rational risk-averse investor will choose a portfolio

1. Abelow the efficient frontier✓
2. Bon the efficient frontier✓
3. Cwith maximum variance✓
4. Dmade of a single asset✓

Combining a risk-free asset with risky portfolios generates the

1. Asecurity market line✓
2. Befficient frontier of risky assets✓
3. Cindifference curve✓
4. Dcapital allocation (capital market) line✓

A more risk-averse investor will have indifference curves that are

1. Asteeper✓
2. Bflatter✓
3. Chorizontal✓
4. Ddownward sloping✓

An investor's indifference curves in mean-variance space represent

1. Aequal returns only✓
2. Bcombinations of risk and return giving equal utility✓
3. Cthe efficient frontier✓
4. Dthe risk-free rate✓

The variance of a two-asset portfolio depends on the weights, the variances, and the

1. Acovariance between the two assets✓
2. Bdividend yields✓
3. Ccoupon rates✓
4. DP/E ratios✓

Total risk of a security equals

1. Abeta only✓
2. Bunsystematic risk only✓
3. Csystematic risk plus unsystematic risk✓
4. Dcovariance only✓

The Capital Market Line measures risk on its horizontal axis using

1. Abeta✓
2. Bcovariance✓
3. Cstandard deviation (total risk)✓
4. Dthe coefficient of variation✓

The point where the capital market line is tangent to the efficient frontier is the

1. Amarket (tangency) portfolio✓
2. Bminimum-variance portfolio✓
3. Crisk-free asset✓
4. Dzero-beta portfolio✓

The Sharpe ratio measures excess return per unit of

1. Abeta✓
2. Bcovariance✓
3. Ctotal risk (standard deviation)✓
4. Dcorrelation✓

The Treynor ratio measures excess return per unit of

1. Abeta (systematic risk)✓
2. Btotal risk✓
3. Cvariance✓
4. Dcorrelation✓

Jensen's alpha measures a portfolio's

1. Atotal risk✓
2. Bbeta✓
3. Cstandard deviation✓
4. Dreturn in excess of that predicted by the CAPM✓

The beta of a portfolio is the

1. Asum of the individual asset betas✓
2. Bweighted average of the betas of its component assets✓
3. Chighest asset beta✓
4. Dalways equal to one✓