Lesson #4 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

Under the “Don’t put all your eggs in one basket” analogy, spreading your investments allows you to:

❌ Maximize the possibility that good luck for a single investment positively affects your overall portfolio.
❌ Increase the uncertainty of your overall portfolio so you can try to generate an extra return.
❌ Maximize the return of your overall portfolio.
✅ Minimize the possibility that bad luck for a single investment adversely affects your overall portfolio.

Explanation:
Diversification reduces the impact of poor performance from any one investment, lowering overall portfolio risk.

Question 2

Risk diversification can be better achieved: (Select all that apply)

❌ With only stocks in your portfolio.
✅ With mutual funds or unit investment trusts if you hold a small number of assets.
❌ By including all asset classes regardless of their risks.
❌ With only low-risk assets in your portfolio.

Explanation:
Mutual funds and unit investment trusts provide built-in diversification, especially helpful when an investor cannot hold many individual assets.

Question 3

Short selling is motivated by the belief that:

❌ The price of the security will rise.
❌ Short selling is never prompted by speculation.
✅ The price of the security will decline.
❌ The price of the security will stay the same.

Explanation:
Investors short sell when they expect the price of a security to fall, allowing them to buy it back later at a lower price.

Question 4

The expected return of a portfolio is computed as ___________ and the standard deviation of a portfolio is ___________.

❌ Simple average of returns / weighted average of standard deviations
❌ Weighted average of returns / weighted average of standard deviations
✅ Weighted average of expected returns (by investment weights) / NOT the weighted average of individual standard deviations
❌ Simple average of returns / weighted average of standard deviations

Explanation:
Portfolio return is a weighted average, while portfolio risk depends on correlations between assets—not a simple weighted average of individual risks.

Question 5

An efficient portfolio is a combination of assets which:

❌ Minimizes risk by ensuring only diversifiable risk remains.
✅ Achieves the highest return for a given risk.
❌ Offers a risk-free rate of return.
❌ Achieves the highest possible covariance among assets.

Explanation:
An efficient portfolio lies on the efficient frontier, delivering the maximum possible return for a given level of risk.

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