If the Plotting of a Portfolio's Returns Against Returns on the Market

question 40

Multiple Choice

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then:

• A)the portfolio appears to be well diversified.
• B)the portfolio has a Beta of 1.0.
• C)the portfolio has very little systematic risk.
• D)the portfolio has a very low market risk premium.

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Definitions:

Normal Good

A good for which demand increases as the income of the consumer increases, and vice versa, holding all other factors constant.

Income Effect

The change in consumer demand for goods and services induced by a change in income, affecting the purchasing power of the consumer.

Substitution Effect

The change in consumption patterns due to a change in relative prices, prompting consumers to substitute one good for another.

Giffen Good

A rare type of good whose demand increases as its price increases, violating the basic law of demand, typically due to the absence of close substitutes.