Test your knowledge

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What assumption does Modern Portfolio Theory make regarding risk?

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Investors welcome risk.

Investors want to avoid unnecessary risk.

Risk is healthy.

Low risk can yield high returns.

Investors want to avoid unnecessary risk. The theory seeks the maximum return on a low level of risk.

If an investor is not afraid of taking risks, he or she is risk-averse.

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True

False

False. Risk-averse people are, to varying extents, wary of risk and do not invite it.

The main benefit of an efficient portfolio is high returns.

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True

False

False. The main benefit of an efficient portfolio is low volatility for a given level of return.

Modern Portfolio Theory is based on the relationship between risk and volatility.

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True

False

False. Modern Portfolio Theory is based on the relationship between risk and reward.

If you invest in a portfolio at the bottom of the efficient frontier curve, the portfolio has _______.

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High returns and high risk

High returns and low risk

Low returns and high risk

Low returns and low risk

Low returns and low risk. The bottom of the efficient frontier involves low risk and low return.

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