Question 1

The riskiness of individual assets

Accepted Answer

A) should be considered for the asset in isolation. 
B) should be considered in the context of the effect on overall portfolio volatility. 
C) should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio. 
D) should be considered in the context of the effect on overall portfolio volatility and should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio. 
A) should be considered for the asset in isolation. 
B) should be considered in the context of the effect on overall portfolio volatility. 
C) should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio. 
D) should be considered in the context of the effect on overall portfolio volatility and should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio.

Question 2

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 values of your positions in X and Y, respectively, if you decide to hold 40% of your money in the risky portfolio and 60% in T-bills?

Accepted Answer

A) $240; $360 
B) $360; $240 
C) $100; $240 
D) $240; $160 
A) $240; $360 
B) $360; $240 
C) $100; $240 
D) $240; $160

Question 3

Steve is more risk-averse than Edie.On a graph that shows Steve and Edie's indifference curves, which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis. I) Steve and Edie's indifference curves might intersect.
II. Steve's indifference curves will have flatter slopes than Edie's.
III. Steve's indifference curves will have steeper slopes than Edie's.
IV. Steve and Edie's indifference curves will not intersect.
V. Steve's indifference curves will be downward sloping, and Edie's will be upward sloping.

Accepted Answer

A) I and V 
B) I and III 
C) III and IV 
D) I and II 
A) I and V 
B) I and III 
C) III and IV 
D) I and II

Question 4

According to the mean-variance criterion, which one of the following investments dominates all others?

Accepted Answer

A) E(r) = 0.15; Variance = 0.20 
B) E(r) = 0.10; Variance = 0.20 
C) E(r) = 0.10; Variance = 0.25 
D) E(r) = 0.15; Variance = 0.25 
A) E(r) = 0.15; Variance = 0.20 
B) E(r) = 0.10; Variance = 0.20 
C) E(r) = 0.10; Variance = 0.25 
D) E(r) = 0.15; Variance = 0.25

Question 5

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A) 0.086; 0.242 
B) 0.054; 0.104 
C) 0.295; 0.123 
D) 0.087; 0.182 
A) 0.086; 0.242 
B) 0.054; 0.104 
C) 0.295; 0.123 
D) 0.087; 0.182

Question 6

In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor?

Accepted Answer

A) It is the locus of portfolios that have the same expected rates of return and different standard deviations. 
B) It is the locus of portfolios that have the same standard deviations and different rates of return. 
C) It is the locus of portfolios that offer the same utility according to returns and standard deviations. 
D) It connects portfolios that offer increasing utilities according to returns and standard deviations. 
A) It is the locus of portfolios that have the same expected rates of return and different standard deviations. 
B) It is the locus of portfolios that have the same standard deviations and different rates of return. 
C) It is the locus of portfolios that offer the same utility according to returns and standard deviations. 
D) It connects portfolios that offer increasing utilities according to returns and standard deviations.

Question 7

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. A portfolio that has an expected outcome of $114 is formed by

Accepted Answer

A) investing $100 in the risky asset. 
B) investing $80 in the risky asset and $20 in the risk-free asset. 
C) borrowing $46 at the risk-free rate and investing the total amount ($146) in the risky asset. 
D) investing $43 in the risky asset and $57 in the risk-free asset. 
A) investing $100 in the risky asset. 
B) investing $80 in the risky asset and $20 in the risk-free asset. 
C) borrowing $46 at the risk-free rate and investing the total amount ($146) in the risky asset. 
D) investing $43 in the risky asset and $57 in the risk-free asset.

Question 8

In a return-standard deviation space, which of the following statements is(are)true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) I) An investor's own indifference curves might intersect.
II) Indifference curves have negative slopes.
III) In a set of indifference curves, the highest offers the greatest utility.
IV) Indifference curves of two investors might intersect.

Accepted Answer

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

Question 9

Given the capital allocation line, an investor's optimal portfolio is the portfolio that

Accepted Answer

A) maximizes her expected profit. 
B) maximizes her risk. 
C) minimizes both her risk and return. 
D) maximizes her expected utility. 
A) maximizes her expected profit. 
B) maximizes her risk. 
C) minimizes both her risk and return. 
D) maximizes her expected utility.

Question 10

The presence of risk means that

Accepted Answer

A) investors will lose money. 
B) more than one outcome is possible. 
C) the standard deviation of the payoff is larger than its expected value. 
D) final wealth will be greater than initial wealth. 
A) investors will lose money. 
B) more than one outcome is possible. 
C) the standard deviation of the payoff is larger than its expected value. 
D) final wealth will be greater than initial wealth.

Question 11

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 risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.20?

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 12

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60% in a T-bill that pays 4.5%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A) 0.114; 0.126 
B) 0.087; 0.068 
C) 0.095; 0.113 
D) 0.087; 0.124 
A) 0.114; 0.126 
B) 0.087; 0.068 
C) 0.095; 0.113 
D) 0.087; 0.124

Question 13

Asset allocation may involve

Accepted Answer

A) the decision as to the allocation between a risk-free asset and a risky asset. 
B) the decision as to the allocation among different risky assets. 
C) considerable security analysis. 
D) the decision as to the allocation between a risk-free asset and a risky asset and the decision as to the allocation among different risky assets. 
A) the decision as to the allocation between a risk-free asset and a risky asset. 
B) the decision as to the allocation among different risky assets. 
C) considerable security analysis. 
D) the decision as to the allocation between a risk-free asset and a risky asset and the decision as to the allocation among different risky assets.

Question 14

An investor invests 70% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 30% in a T-bill that pays 5%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A) 0.120; 0.14 
B) 0.087; 0.06 
C) 0.295; 0.12 
D) 0.087; 0.12 
A) 0.120; 0.14 
B) 0.087; 0.06 
C) 0.295; 0.12 
D) 0.087; 0.12

Question 15

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 risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.09?

Accepted Answer

A) 85% and 15% 
B) 75% and 25% 
C) 67% and 33% 
D) 57% and 43% 
A) 85% and 15% 
B) 75% and 25% 
C) 67% and 33% 
D) 57% and 43%

Question 16

The exact indifference curves of different investors

Accepted Answer

A) cannot be known with perfect certainty. 
B) can be calculated precisely with the use of advanced calculus. 
C) although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client. 
D) cannot be known with perfect certainty and, although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client. 
A) cannot be known with perfect certainty. 
B) can be calculated precisely with the use of advanced calculus. 
C) although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client. 
D) cannot be known with perfect certainty and, although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client.

Question 17

When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess?

Accepted Answer

A) The investor's prior investing experience 
B) The investor's degree of financial security 
C) The investor's tendency to make risky or conservative choices 
D) The level of return the investor prefers 
A) The investor's prior investing experience 
B) The investor's degree of financial security 
C) The investor's tendency to make risky or conservative choices 
D) The level of return the investor prefers

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. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

Accepted Answer

A) 0.47. 
B) 0.80. 
C) 2.14. 
D) 0.40. 
A) 0.47. 
B) 0.80. 
C) 2.14. 
D) 0.40.

Question 19

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. 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 0.13?

Accepted Answer

A) 130.77% and -30.77% 
B) -30.77% and 130.77% 
C) 67.67% and 33.33% 
D) 57.75% and 42.25% 
A) 130.77% and -30.77% 
B) -30.77% and 130.77% 
C) 67.67% and 33.33% 
D) 57.75% and 42.25%

Exam 6: Capital Allocation to Risky Assets

The riskiness of individual assets

According to the mean-variance criterion, which one of the following investments dominates all others?

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor?

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. A portfolio that has an expected outcome of $114 is formed by

Given the capital allocation line, an investor's optimal portfolio is the portfolio that

The presence of risk means that

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60% in a T-bill that pays 4.5%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

Asset allocation may involve

An investor invests 70% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 30% in a T-bill that pays 5%.His portfolio's expected return and standard deviation are __________ and __________, respectively.

The exact indifference curves of different investors

When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess?

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. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

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 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%.His portfolio's expected return and standard deviation are and , respectively.

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60% in a T-bill that pays 4.5%.His portfolio's expected return and standard deviation are and , respectively.

An investor invests 70% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 30% in a T-bill that pays 5%.His portfolio's expected return and standard deviation are and , respectively.