investment chapter6

Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

27. Given the capital allocation line, an investor's optimal portfolio is the portfolio that A. maximizes her expected profit. B. maximizes her risk.

C. minimizes both her risk and return. D. maximizes her expected utility. E. minimizes her risk.

28. 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. A. 0.114; 0.12 B. 0.087; 0.06 C. 0.295; 0.12 D. 0.087; 0.12 E. 0.795; 0.14

29. 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. 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

30. An investor invests 40 percent of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60 percent in a T-bill that pays 4.5 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively. A. 0.114; 0.126 B. 0.087; 0.068 C. 0.095; 0.113 D. 0.087; 0.124 E. 0.795; 0.14

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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

31. An investor invests 70 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 30 percent in a T-bill that pays 5 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively. A. 0.120; 0.14 B. 0.087; 0.06 C. 0.295; 0.12 D. 0.087; 0.12 E. 0.895; 0.11

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.

32. 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? A. 85% and 15% B. 75% and 25% C. 67% and 33% D. 57% and 43%

E. Cannot be determined.

33. 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? A. 30% and 70% B. 50% and 50% C. 60% and 40% D. 40% and 60%

E. Cannot be determined.

34. A portfolio that has an expected outcome of $115 is formed by A. Investing $100 in the risky asset.

B. Investing $80 in the risky asset and $20 in the risk-free asset.

C. Borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky asset. D. Investing $43 in the risky asset and $57 in the riskless asset. E. such a portfolio cannot be formed.

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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

35. The slope of the Capital Allocation Line formed with the risky asset and the risk-free asset is equal to A. 0.4667. B. 0.8000. C. 2.14. D. 0.41667.

E. Cannot be determined.

36. Consider a T-bill with a rate of return of 5 percent 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 4 risky securities, would a risk-averse investor always choose his portfolio?

A. The set of portfolios formed with the T-bill and security A. B. The set of portfolios formed with the T-bill and security B. C. The set of portfolios formed with the T-bill and security C. D. The set of portfolios formed with the T-bill and security D. E. Cannot be determined.

You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with 2 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.

37. 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? A. 0.25; 0.75 B. 0.19; 0.81 C. 0.65; 0.35 D. 0.50; 0.50

E. Cannot be determined.

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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

38. If you want to form a portfolio with an expected rate of return of 0.10, what percentages of your money must you invest in the T-bill, X, and Y, respectively if you keep X and Y in the same proportions to each other as in portfolio P? A. 0.25; 0.45; 0.30 B. 0.19; 0.49; 0.32 C. 0.32; 0.41; 0.27 D. 0.50; 0.30; 0.20

E. Cannot be determined.

39. What would be the dollar values of your positions in X and Y, respectively, if you decide to hold 40% percent of your money in the risky portfolio and 60% in T-bills? A. $240; $360 B. $360; $240 C. $100; $240 D. $240; $160

E. Cannot be determined.

40. 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? A. Cannot be determined. B. $568; $378; $54 C. $568; $54; $378 D. $378; $54; $568 E. $108; $514; $378

41. A reward-to-volatility ratio is useful in: A. measuring the standard deviation of returns.

B. understanding how returns increase relative to risk increases. C. analyzing returns on variable rate bonds. D. assessing the effects of inflation. E. None of these is correct.

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