Question 1

Which of the following statements regarding the Capital Allocation Line (CAL)is false?

Accepted Answer

A)  The CAL shows risk-return combinations. 
B)  The slope of the CAL equals the increase in the expected return of a risky portfolio per unit of additional standard deviation. 
C)  The slope of the CAL is also called the reward-to-variability ratio. 
D)  The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset. 
E)  both a and d are true. 
A)  The CAL shows risk-return combinations. 
B)  The slope of the CAL equals the increase in the expected return of a risky portfolio per unit of additional standard deviation. 
C)  The slope of the CAL is also called the reward-to-variability ratio. 
D)  The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset. 
E)  both a and d are true. D

Question 2

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)  a and c. 
E)  none of these. 
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)  a and c. 
E)  none of these. D

Question 3

Assume an investor with the following utility function: U = E(r)- 3/2(s2).To maximize her expected utility,she would choose the asset with an expected rate of return of _______ and a standard deviation of ________,respectively

Accepted Answer

A)  12%;20% 
B)  10%;15% 
C)  10%;10% 
D)  8%;10% 
E)  none of these 
A)  12%;20% 
B)  10%;15% 
C)  10%;10% 
D)  8%;10% 
E)  none of these C

Question 4

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15.The risk-free rate is 6 percent.An investor has the following utility function: U = E(r)- (A/2)s2.Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

Accepted Answer

A)  5 
B)  6 
C)  7 
D)  8 
E)  none of these 
A)  5 
B)  6 
C)  7 
D)  8 
E)  none of these

Question 5

You are a risk-averse investor.Portfolio A has E(r)= 12% and σ= 18%.Portfolio B has σ = 21%,and has end-of-year cash flows of either $84,000 or $144,000 with equal probability.At what price for portfolio B would you be indifferent between A and B?

Accepted Answer

A)  $100,000 
B)  $101,786 
C)  $84,000 
D)  $121,000 
E)  None of these 
A)  $100,000 
B)  $101,786 
C)  $84,000 
D)  $121,000 
E)  None of these

Question 6

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)  Cannot be determined 
B)  $568;$378;$54 
C)  $568;$54;$378 
D)  $378;$54;$568 
E)  $108;$514;$378 
A)  Cannot be determined 
B)  $568;$378;$54 
C)  $568;$54;$378 
D)  $378;$54;$568 
E)  $108;$514;$378

Question 7

In the utility function: U = E(r)-0.005As2,what is the significance of "A"?

Accepted Answer

A is simply a scale factor indicating th

Question 8

The standard deviation of a portfolio of assets

Accepted Answer

A)  increases as the number of assets in the portfolio increases. 
B)  increases as the weight in any particular asset increases. 
C)  increases as the standard deviations of the assets change through time. 
D)  increases as the assets' expected returns increase. 
E)  increases as the assets' covariances increase. 
A)  increases as the number of assets in the portfolio increases. 
B)  increases as the weight in any particular asset increases. 
C)  increases as the standard deviations of the assets change through time. 
D)  increases as the assets' expected returns increase. 
E)  increases as the assets' covariances increase.

Question 9

A T-bill pays 6 percent rate of return.Would risk-averse investors invest in a risky portfolio that pays 12 percent with a probability of 40 percent or 2 percent with a probability of 60 percent?

Accepted Answer

A)  Yes,because they are rewarded with a risk premium. 
B)  No,because they are not rewarded with a risk premium. 
C)  No,because the risk premium is small. 
D)  Cannot be determined. 
E)  None of these. 
A)  Yes,because they are rewarded with a risk premium. 
B)  No,because they are not rewarded with a risk premium. 
C)  No,because the risk premium is small. 
D)  Cannot be determined. 
E)  None of these.

Question 10

Adding a home insurance policy to your portfolio of assets is an example of

Accepted Answer

A)  speculating 
B)  asset dominance 
C)  hedging 
D)  neurosis 
E)  risk neutrality 
A)  speculating 
B)  asset dominance 
C)  hedging 
D)  neurosis 
E)  risk neutrality

Question 11

What is a fair game? Explain how the term relates to a risk-averse investor's attitude toward speculation and risk and how the utility function reflects this attitude.

Accepted Answer

A fair game is a prospect that has a zer

Question 12

Toby and Hannah are two risk-averse investors.Toby is more risk-averse than Hannah.Draw one indifference curve for Toby and one indifference curve for Hannah on the same graph.Show how these curves illustrate their relative levels of risk aversion.

Accepted Answer

The curves may or may not intersect with

Question 13

An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.13 and a variance of 0.03 and 70 percent in a T-bill that pays 6 percent.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 
E)  0.795;0.14 
A)  0.114;0.128 
B)  0.087;0.063 
C)  0.295;0.125 
D)  0.081;0.052 
E)  0.795;0.14

Question 14

Consider a risky portfolio,A,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?

Accepted Answer

A)  E(r)= 0.15;Standard deviation = 0.20 
B)  E(r)= 0.15;Standard deviation = 0.10 
C)  E(r)= 0.10;Standard deviation = 0.10 
D)  E(r)= 0.20;Standard deviation = 0.15 
E)  E(r)= 0.10;Standard deviation = 0.20 
A)  E(r)= 0.15;Standard deviation = 0.20 
B)  E(r)= 0.15;Standard deviation = 0.10 
C)  E(r)= 0.10;Standard deviation = 0.10 
D)  E(r)= 0.20;Standard deviation = 0.15 
E)  E(r)= 0.10;Standard deviation = 0.20

Question 15

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

Accepted Answer

A)  negative 
B)  zero 
C)  positive 
D)  northeast 
E)  cannot be determined 
A)  negative 
B)  zero 
C)  positive 
D)  northeast 
E)  cannot be determined

Question 16

If a T-bill pays 5 percent,which of the following investments would not be chosen by a risk-averse investor?

Accepted Answer

A)  An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40. 
B)  An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60. 
C)  An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80. 
D)  An asset that pays 10 percent with a probability of 0.30 or 3.75 percent with a probability of 0.70. 
E)  neither a nor b would be chosen. 
A)  An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40. 
B)  An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60. 
C)  An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80. 
D)  An asset that pays 10 percent with a probability of 0.30 or 3.75 percent with a probability of 0.70. 
E)  neither a nor b would be chosen.

Question 17

Passive investing

Accepted Answer

A)  may be accomplished by investing in index mutual funds. 
B)  involves considerable security selection. 
C)  involves considerable transaction costs. 
D)  a and c. 
E)  b and c. 
A)  may be accomplished by investing in index mutual funds. 
B)  involves considerable security selection. 
C)  involves considerable transaction costs. 
D)  a and c. 
E)  b and c.

Question 18

An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent.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;0.12 
D)  0.087;0.12 
E)  none of these 
A)  0.114;0.12 
B)  0.087;0.06 
C)  0.295;0.12 
D)  0.087;0.12 
E)  none of these

Question 19

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)  combined with the riskiness of other individual assets (in the proportions these assets constitute of the entire portfolio)should be the relevant risk measure. 
D)  b and c. 
E)  none of these. 
A)  should be considered for the asset in isolation. 
B)  should be considered in the context of the effect on overall portfolio volatility. 
C)  combined with the riskiness of other individual assets (in the proportions these assets constitute of the entire portfolio)should be the relevant risk measure. 
D)  b and c. 
E)  none of these.

Question 20

Consider the following two investment alternatives.First,a risky portfolio that pays a 15 percent rate of return with a probability of 60% or a 5 percent return with a probability of 40%,and second,a T-bill that pays 6 percent.The risk premium on the risky investment is

Accepted Answer

A)  11 percent. 
B)  1 percent. 
C)  9 percent. 
D)  5 percent. 
E)  none of these. 
A)  11 percent. 
B)  1 percent. 
C)  9 percent. 
D)  5 percent. 
E)  none of these.

Exam 5: Risk and Return: Past and Prologue

Which of the following statements regarding the Capital Allocation Line (CAL)is false?

The exact indifference curves of different investors

Assume an investor with the following utility function: U = E(r)- 3/2(s2).To maximize her expected utility,she would choose the asset with an expected rate of return of _______ and a standard deviation of ________,respectively

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15.The risk-free rate is 6 percent.An investor has the following utility function: U = E(r)- (A/2)s2.Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

You are a risk-averse investor.Portfolio A has E(r)= 12% and σ= 18%.Portfolio B has σ = 21%,and has end-of-year cash flows of either $84,000 or $144,000 with equal probability.At what price for portfolio B would you be indifferent between A and B?

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?

In the utility function: U = E(r)-0.005As2,what is the significance of "A"?

The standard deviation of a portfolio of assets

A T-bill pays 6 percent rate of return.Would risk-averse investors invest in a risky portfolio that pays 12 percent with a probability of 40 percent or 2 percent with a probability of 60 percent?

Adding a home insurance policy to your portfolio of assets is an example of

What is a fair game? Explain how the term relates to a risk-averse investor's attitude toward speculation and risk and how the utility function reflects this attitude.

Toby and Hannah are two risk-averse investors.Toby is more risk-averse than Hannah.Draw one indifference curve for Toby and one indifference curve for Hannah on the same graph.Show how these curves illustrate their relative levels of risk aversion.

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

Consider a risky portfolio,A,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?

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

If a T-bill pays 5 percent,which of the following investments would not be chosen by a risk-averse investor?

Passive investing

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

The riskiness of individual assets

Consider the following two investment alternatives.First,a risky portfolio that pays a 15 percent rate of return with a probability of 60% or a 5 percent return with a probability of 40%,and second,a T-bill that pays 6 percent.The risk premium on the risky investment is

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

Assume an investor with the following utility function: U = E(r)- 3/2(s²).To maximize her expected utility,she would choose the asset with an expected rate of return of _ and a standard deviation of __,respectively

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15.The risk-free rate is 6 percent.An investor has the following utility function: U = E(r)- (A/2)s².Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

In the utility function: U = E(r)-0.005As²,what is the significance of "A"?

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

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