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Question 1

Modern portfolio theory

Answer 1

Investors are risk averse and if given the choice of 2 investments offering the same return then they would choose the less risky option

Question 2

Positive correlation
Negative correlation
No correlation

Answer 2

P - move in same direction
N - move in opposite directions
No - no relationship

Question 3

Efficient frontier

Answer 3

Measures relationship between the return and the amount that can be expected from a portfolio and its risk

Question 4

What does diversification not reduce risk of?

Answer 4

Systematic risk

Question 5

4 Disadvantages of efficient frontier?

Answer 5

Standard deviation is correct measure of risk

Works on historic data

No account for charges

Attitude to risk may not be only key consideration

Question 6

Capital asset pricing model

Answer 6

In order for a client to take additional risk then the reward must give risk free return plus compensation (additional income to compensate for extra risk taken)

Question 7

Dana and French model

Answer 7

Builds on CAPM but adds in factors on company size. Found smaller companies seem to out perform larger ones although they’re more volatile

Question 8

Arbitrage pricing theory

Answer 8

Taking advantage of mispricing

Question 9

Efficient market hypothesis

Answer 9

Theory that prices react instantly based upon information and so prices are never misvalued and always fair

Question 10

Prospect theory

Answer 10

People do not always act rationally particularly when facing profit or loss on investment decisions

Question 11

Beta means what regarding CAPM model?

Answer 11

1, which means this is the market’s benchmark for investment return