Question 1

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

Question 2

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.

Question 3

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. D

Question 4

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.

Question 5

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.

Question 6

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. D

Question 7

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.

Question 8

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

Question 9

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.

Question 10

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 11

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

Question 12

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 13

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

Question 14

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 C

Question 15

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

Question 16

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

Question 17

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

Question 18

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.

Question 19

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 20

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

Exam 5: Risk and Return: Past and Prologue

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.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The exact indifference curves of different investors

Correct AnswerverifiedD

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

Correct AnswerverifiedShow Answer

The standard deviation of a portfolio of assets

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedD

The riskiness of individual assets

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedA fair game is a prospect that has a zer...View AnswerShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedA is simply a scale factor indicating th...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedC

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Passive investing

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedThe curves may or may not intersect with...View AnswerShow Answer

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.

Correct AnswerverifiedShow Answer

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.

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A fair game is a prospect that has a zer...
View Answer

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

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A is simply a scale factor indicating th...
View Answer

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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

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C

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?

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The curves may or may not intersect with...
View Answer

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.

Correct Answer
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