Exam 6: Capital Allocation to Risky Assets

The capital market line I) is a special case of the capital allocation line. II) represents the opportunity set of a passive investment strategy. III) has the one-month T-Bill rate as its intercept. IV) uses a broad index of common stocks as its risky portfolio.

The standard deviation of a two asset portfolio with a correlation coefficient of .35 will be _______________ the weighted average standard deviation of the portfolio.

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

An investor invests 40% 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.

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?

Use the below information to answer the following question. Investment Expected Return E(r) Standard Deviation 1 0.12 0.13 2 0.15 0.15 3 0.21 0.16 4 0.24 0.21 U = E(r)? (A/2)s². Which investment would you select if you were risk neutral?

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?

Assume an investor with the following utility function: U = E(r) − 0.60(s²). To maximize her expected utility, which one of the following investment alternatives would she choose?

Treasury bills are commonly viewed as risk-free assets because

An investor invests 60% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 40% in a T-bill that pays 5%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

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

The certainty equivalent rate of a portfolio is

An investor invests 25% 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.

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.

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?

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

Assume an investor with the following utility function: U = E(r)− 0.60(s²). To maximize her expected utility, she would choose the asset with an expected rate of return of _______ and a standard deviation of ________, respectively.

Consider a T-bill with a rate of return of 5% and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04 Security B: E(r) = 0.10; Variance = 0.0225 Security C: E(r) = 0.12; Variance = 0.01 Security D: E(r) = 0.13; Variance = 0.0625 From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse investor always choose his portfolio?

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

Consider a risky portfolio, X, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve for a risk averse investor?