Question: Portfolio Analysis ( 15 points)

1. What is an efficient portfolio? How is it related to the efficient frontier? What are the key steps involved in identifying an efficient set of portfolios for an investor? (10 points)
2. Answer whether the following five statements are true (T) or false (F). Feel free to offer an explanation, if you think it is needed (5 points)

• Diversification eliminates common and idiosyncratic risks alike.

• If the CAPM correctly prices risk, the market portfolio of all risky securities is efficient.
• Beta is the sensitivity of an investment’s returns to fluctuations in Treasury bill yields.
• Portfolios with securities sold short have negative portfolio weights for those securities.
• Efficient portfolios are those with only diversifiable risk; it contains no systematic risk.

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