Portfolios and Investment Strategies a. (1 point) Your uncle made money in the s
ID: 2802855 • Letter: P
Question
Portfolios and Investment Strategies
a. (1 point) Your uncle made money in the stock market. That means markets are inefficient. CIRCLE ONE: TRUE FALSE
b. (1 point) Risk parity portfolios invest:
a) more into risky assets
b) less into risky assets
c) equally into assets regardless of their risk profile
d) depending on the expected returns of the assets as well as their risk profiles
CIRCLE ONE: A B C D
c. (1 point) Order these portfolio construction methods in terms of their typical real-world performance as measured by the Sharpe ratio.
a) Equal weighted does best, then risk parity, then the mathematically “optimal” one.
b) Risk parity does best, then equal weighted, then the mathematically “optimal” one.
c) The mathematically “optimal” one does best, then risk parity, then equal weighted.
d) Equal weighted does best, then the mathematically “optimal” one, then risk parity.
e) Risk parity does best, then the mathematically “optimal” one, then equal weighted.
f) The mathematically “optimal” one does best, then equal weighted, then risk parity.
CIRCLE ONE: A B C D E F
d. (1 point) If stocks that have gone up tend to continue going up, while stocks that have gone down tend to continue going down, then that is a problem for the efficient market hypothesis. CIRCLE ONE: TRUE FALSE
e. (1 point) If I have a strategy with a Sharpe ratio of 2, and you have a different, uncorrelated strategy with a Sharpe ratio of 3, what would be the Sharpe ratio of a strategy that invests 50% into your strategy and 50% into my strategy? (Which of the following do we know for sure?)
a) The Sharpe ratio will be less than 2
b) The Sharpe ratio will be more than 2 and less than 3, but that’s all we know
c) The Sharpe ratio will be more than 2, and possibly even more than 3
d) The Sharpe ratio will be right around 2.5
e) Impossible to answer with the information given
CIRCLE ONE: A B C D E
Explanation / Answer
a. (1 point) Your uncle made money in the stock market. That means markets are inefficient- False
b. (1 point) Risk parity portfolios invest: d) depending on the expected returns of the assets as well as their risk profiles
c. (1 point) Order these portfolio construction methods in terms of their typical real-world performance as measured by the Sharpe ratio. c) The mathematically “optimal” one does best, then risk parity, then equal weighted.
d. (1 point) If stocks that have gone up tend to continue going up, while stocks that have gone down tend to continue going down, then that is a problem for the efficient market hypothesis. True
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