Question 1

In the mean-standard deviation graph, an indifference curve has a ________ slope.

Accepted Answer

A) negative 
B) zero 
C) positive 
D) vertical 
A) negative 
B) zero 
C) positive 
D) vertical C

Question 2

To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then

Accepted Answer

A) find the utility of a portfolio with 0% in the risk-free asset. 
B) change the expected return of the portfolio and equate the utility to the standard deviation. 
C) find another utility level with 0% risk. 
D) change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level. 
A) find the utility of a portfolio with 0% in the risk-free asset. 
B) change the expected return of the portfolio and equate the utility to the standard deviation. 
C) find another utility level with 0% risk. 
D) change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level. D

Question 3

The change from a straight to a kinked capital allocation line is a result of

Accepted Answer

A) reward-to-volatility ratio increasing. 
B) borrowing rate exceeding lending rate. 
C) an investor's risk tolerance decreasing. 
D) increase in the portfolio proportion of the risk-free asset. 
A) reward-to-volatility ratio increasing. 
B) borrowing rate exceeding lending rate. 
C) an investor's risk tolerance decreasing. 
D) increase in the portfolio proportion of the risk-free asset. B

Question 4

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A) 0.089; 0.111 
B) 0.087; 0.063 
C) 0.096; 0.126 
D) 0.087; 0.144 
A) 0.089; 0.111 
B) 0.087; 0.063 
C) 0.096; 0.126 
D) 0.087; 0.144

Question 5

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.13 and a variance of 0.03 and 70% in a T-bill that pays 6%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A) 0.114; 0.128 
B) 0.087; 0.063 
C) 0.295; 0.125 
D) 0.081; 0.052 
A) 0.114; 0.128 
B) 0.087; 0.063 
C) 0.295; 0.125 
D) 0.081; 0.052

Question 6

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A) 0.114; 0.12 
B) 0.087; 0.06 
C) 0.295; 0.06 
D) 0.087; 0.12 
A) 0.114; 0.12 
B) 0.087; 0.06 
C) 0.295; 0.06 
D) 0.087; 0.12

Question 7

You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.06?

Accepted Answer

A) 30% and 70% 
B) 50% and 50% 
C) 60% and 40% 
D) 40% and 60% 
A) 30% and 70% 
B) 50% and 50% 
C) 60% and 40% 
D) 40% and 60%

Question 8

Assume an investor with the following utility function: U=E(r) - 3/2(s2). To maximize her expected utility, which one of the following investment alternatives would she choose?

Accepted Answer

A) A portfolio that pays 10% with a 60% probability or 5% with 40% probability. 
B) A portfolio that pays 10% with 40% probability or 5% with a 60% probability. 
C) A portfolio that pays 12% with 60% probability or 5% with 40% probability. 
D) A portfolio that pays 12% with 40% probability or 5% with 60% probability. 
A) A portfolio that pays 10% with a 60% probability or 5% with 40% probability. 
B) A portfolio that pays 10% with 40% probability or 5% with a 60% probability. 
C) A portfolio that pays 12% with 60% probability or 5% with 40% probability. 
D) A portfolio that pays 12% with 40% probability or 5% with 60% probability.

Question 9

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills.The information below refers to these assets.   What is the expected return on Bo's complete portfolio?

Accepted Answer

A) 10.32% 
B) 5.28% 
C) 9.62% 
D) 8.44% 
A) 10.32% 
B) 5.28% 
C) 9.62% 
D) 8.44%

Question 10

The capital allocation line can be described as the

Accepted Answer

A) investment opportunity set formed with a risky asset and a risk-free asset. 
B) investment opportunity set formed with two risky assets. 
C) line on which lie all portfolios that offer the same utility to a particular investor. 
D) line on which lie all portfolios with the same expected rate of return and different standard deviations. 
A) investment opportunity set formed with a risky asset and a risk-free asset. 
B) investment opportunity set formed with two risky assets. 
C) line on which lie all portfolios that offer the same utility to a particular investor. 
D) line on which lie all portfolios with the same expected rate of return and different standard deviations.

Question 11

Based on their relative degrees of risk tolerance,

Accepted Answer

A) investors will hold varying amounts of the risky asset in their portfolios. 
B) all investors will have the same portfolio asset allocations. 
C) investors will hold varying amounts of the risk-free asset in their portfolios. 
D) investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios. 
A) investors will hold varying amounts of the risky asset in their portfolios. 
B) all investors will have the same portfolio asset allocations. 
C) investors will hold varying amounts of the risk-free asset in their portfolios. 
D) investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios.

Question 12

In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called

Accepted Answer

A) the security market line. 
B) the capital allocation line. 
C) the indifference curve. 
D) the investor's utility line. 
A) the security market line. 
B) the capital allocation line. 
C) the indifference curve. 
D) the investor's utility line.

Question 13

Treasury bills are commonly viewed as risk-free assets because

Accepted Answer

A) their short-term nature makes their values insensitive to interest rate fluctuations. 
B) the inflation uncertainty over their time to maturity is negligible. 
C) their term to maturity is identical to most investors' desired holding periods. 
D) their short-term nature makes their values insensitive to interest rate fluctuations, and the inflation uncertainty over their time to maturity is negligible. 
A) their short-term nature makes their values insensitive to interest rate fluctuations. 
B) the inflation uncertainty over their time to maturity is negligible. 
C) their term to maturity is identical to most investors' desired holding periods. 
D) their short-term nature makes their values insensitive to interest rate fluctuations, and the inflation uncertainty over their time to maturity is negligible.

Question 14

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y.The weights of X and Y in P are 0.60 and 0.40, respectively.X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081. What would be the dollar value of your positions in X, Y, and the T-bills, respectively, if you decide to hold a portfolio that has an expected outcome of $1,120?

Accepted Answer

A) $568; $378; $54 
B) $568; $54; $378 
C) $378; $54; $568 
D) $108; $514; $378 
A) $568; $378; $54 
B) $568; $54; $378 
C) $378; $54; $568 
D) $108; $514; $378

Question 15

Which of the following statements regarding risk-averse investors is true?

Accepted Answer

A) They only care about the rate of return. 
B) They accept investments that are fair games. 
C) They only accept risky investments that offer risk premiums over the risk-free rate. 
D) They are willing to accept lower returns and high risk. 
A) They only care about the rate of return. 
B) They accept investments that are fair games. 
C) They only accept risky investments that offer risk premiums over the risk-free rate. 
D) They are willing to accept lower returns and high risk.

Question 16

Use the below information to answer the following question.   U=E(r)- (A/2)s2,whereA= 4.0.
Which investment would you select if you were risk neutral?

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
A) 1 
B) 2 
C) 3 
D) 4

Question 17

Which of the following statements is(are) true?
 I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.

Accepted Answer

A) I only 
B) II only 
C) I and II only 
D) II and III only 
A) I only 
B) II only 
C) I and II only 
D) II and III only

Question 18

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08?

Accepted Answer

A) 30% and 70% 
B) 50% and 50% 
C) 60% and 40% 
D) 40% and 60% 
A) 30% and 70% 
B) 50% and 50% 
C) 60% and 40% 
D) 40% and 60%

Question 19

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills.The information below refers to these assets.   What are the proportions of stocks A, B, and C, respectively, in Bo's complete portfolio?

Accepted Answer

A) 40%, 25%, 35% 
B) 8%, 5%, 7% 
C) 32%, 20%, 28% 
D) 16%, 10%, 14% 
A) 40%, 25%, 35% 
B) 8%, 5%, 7% 
C) 32%, 20%, 28% 
D) 16%, 10%, 14%

Question 20

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.11?

Accepted Answer

A) 53.8% and 46.2% 
B) 75% and 25% 
C) 62.5% and 37.5% 
D) 46.2% and 53.8% 
A) 53.8% and 46.2% 
B) 75% and 25% 
C) 62.5% and 37.5% 
D) 46.2% and 53.8%

Exam 6: Capital Allocation to Risky Assets

In the mean-standard deviation graph, an indifference curve has a ________ slope.

To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then

The change from a straight to a kinked capital allocation line is a result of

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.13 and a variance of 0.03 and 70% in a T-bill that pays 6%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Assume an investor with the following utility function: U=E(r) - 3/2(s2). To maximize her expected utility, which one of the following investment alternatives would she choose?

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills.The information below refers to these assets. What is the expected return on Bo's complete portfolio?

The capital allocation line can be described as the

Based on their relative degrees of risk tolerance,

In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called

Treasury bills are commonly viewed as risk-free assets because

Which of the following statements regarding risk-averse investors is true?

Use the below information to answer the following question. U=E(r)- (A/2)s2,whereA= 4.0. Which investment would you select if you were risk neutral?

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills.The information below refers to these assets. What are the proportions of stocks A, B, and C, respectively, in Bo's complete portfolio?

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%.His portfolio's expected return and standard deviation are and , respectively.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.13 and a variance of 0.03 and 70% in a T-bill that pays 6%.His portfolio's expected return and standard deviation are and , respectively.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%.His portfolio's expected return and standard deviation are and , respectively.

Assume an investor with the following utility function: U=E(r) - 3/2(s²). To maximize her expected utility, which one of the following investment alternatives would she choose?

Use the below information to answer the following question. U=E(r)- (A/2)s²,whereA= 4.0. Which investment would you select if you were risk neutral?