Question 1

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 
E) None of these options dominates the other alternatives. 
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 
E) None of these options dominates the other alternatives.

Question 2

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. 
E) the inflation uncertainty over their time to maturity is negligible and their term to maturity is identical to most investors' desired holding periods. 
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. 
E) the inflation uncertainty over their time to maturity is negligible and their term to maturity is identical to most investors' desired holding periods.

Question 3

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 
E) The investor's feelings about loss 
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 
E) The investor's feelings about loss

Question 4

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. 
E) Such a portfolio cannot be formed. 
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. 
E) Such a portfolio cannot be formed.

Question 5

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. 
E) None of the options 
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. 
E) None of the options

Question 6

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. 
E) terminal wealth will be less 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. 
E) terminal wealth will be less than initial wealth.

Question 7

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 8

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 9

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.

Accepted Answer

A) I, III, and IV 
B) II, III, and IV 
C) III and IV 
D) I, II, and III 
E) I, II, III, and IV 
A) I, III, and IV 
B) II, III, and IV 
C) III and IV 
D) I, II, and III 
E) I, II, III, and IV

Question 10

The optimal proportion of the risky asset in the complete portfolio is given by the equation y* = [E(rP) - rf]/(.01A times the variance of P).For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively.Assume the investor is risk averse.

Accepted Answer

The optimal proportion in y is the one t

Question 11

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 
E) None of the options 
A) I and II only 
B) II and III only 
C) I and IV only 
D) III and IV only 
E) None of the options

Question 12

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

Question 13

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% 
A) 12%; 20% 
B) 10%; 15% 
C) 10%; 10% 
D) 8%; 10%

Question 14

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

Question 15

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. 
E) None of the options 
A) maximizes her expected profit. 
B) maximizes her risk. 
C) minimizes both her risk and return. 
D) maximizes her expected utility. 
E) None of the options

Question 16

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 17

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 equation of Bo's capital allocation line

Accepted Answer

A) E(r
C)  = 7.2 + 3.6 × Standard Deviation of C 
B) E(r
C)  = 3.6 + 1.167 × Standard Deviation of C 
C) E(r
C)  = 3.6 + 12.0 × Standard Deviation of C 
D) E(r
C)  = 0.2 + 1.167 × Standard Deviation of C 
E) E(r
C)  = 3.6 + 0.857 × Standard Deviation of C 
A) E(r
C)  = 7.2 + 3.6 × Standard Deviation of C 
B) E(r
C)  = 3.6 + 1.167 × Standard Deviation of C 
C) E(r
C)  = 3.6 + 12.0 × Standard Deviation of C 
D) E(r
C)  = 0.2 + 1.167 × Standard Deviation of C 
E) E(r
C)  = 3.6 + 0.857 × Standard Deviation of C

Question 18

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. If you want to form a portfolio with an expected rate of return of 0.11, what percentages of your money must you invest in the T-bill and P, respectively

Accepted Answer

A) 0.25; 0.75 
B) 0.19; 0.81 
C) 0.65; 0.35 
D) 0.50; 0.50 
E) Cannot be determined 
A) 0.25; 0.75 
B) 0.19; 0.81 
C) 0.65; 0.35 
D) 0.50; 0.50 
E) Cannot be determined

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) 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 20

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. 
E) the decision as to the allocation between a risk-free asset and a risky asset and considerable security analysis. 
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. 
E) the decision as to the allocation between a risk-free asset and a risky asset and considerable security analysis.

Exam 6: Capital Allocation to Risky Assets

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

Treasury bills are commonly viewed as risk-free assets because

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 0.21 and a T-bill with a rate of return of 0.045. A portfolio that has an expected outcome of $114 is formed by

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

The presence of risk means that

The exact indifference curves of different investors

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

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.

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.

Which of the following statements regarding the capital allocation line (CAL) is false

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

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.

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 equation of Bo's capital allocation line

The riskiness of individual assets

Asset allocation may involve

The Investment Environment

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

Behavioral 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

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.

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.