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Advanced Investments
Homework #73
Student Name:__________ ID:__________ Date:__________
1)
Nonsystematic risk is also referred to as
A) diversifiable risk or market risk.
B) market riskor diversifiable risk.
C) diversifiable risk or unique risk.
D) firmspecific risk or market risk.
2)
Which of the following statement(s) is(are) true regarding the variance of a portfolio of
two risky securities?
1.I) The higher the coefficient of correlation between securities, the greater the reduction in the
portfolio variance.
2.II) There is a linear relationship between the securities’ coefficient of correlation and the
portfolio variance.
3.III) The degree to which the portfolio variance is reduced depends on the degree of
correlation between securities.
A) I only
B) III only
C) II only
D) I and II
E) I and III
3)
The expected return of a portfolio of risky securities
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Homework #73
A) is a weighted average of the securities’ returns and the weighted sum of the securities’
variances and covariances.
B) is the sum of the securities’ returns.
C) is a weighted average of the securities’ returns.
D) is the weighted sum of the securities’ variances and covariances.
E) None of the options are correct.
4)
Which of the following statement(s) is(are) false regarding the selection of a portfolio
from those that lie on the capital allocation line?
1.I) Less riskaverse investors will invest more in the riskfree security and less in the optimal
risky portfolio than more riskaverse investors.
2.II) More riskaverse investors will invest less in the optimal risky portfolio and more in the
riskfree security than less riskaverse investors.
3.III) Investors choose the portfolio that maximizes their expected utility.
A) III only
B) I and II
C) I only
D) I and III
E) II only
5)
Security X has expected return of 12% and standard deviation of 18%. Security Y has
expected return of 15% and standard deviation of 26%. If the two securities have a correlation
coefficient of 0.7, what is their covariance?
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Homework #73
A) 0.054
B) 0.070
C) 0.018
D) 0.038
E) 0.033
6)
Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%,
and a risk free rate of 3%, what is the slope of the best feasible CAL?
A) 0.64
B) 0.08
C) 0.13
D) 0.36
E) 0.39
7)
The efficient frontier of risky assets is
A) the portion of the minimumvariance portfolio that lies above the global minimum
variance portfolio.
B) the set of portfolios that have zero standard deviation.
C) the portion of the minimumvariance portfolio that represents the highest standard
deviations.
D) the portion of the minimumvariance portfolio that includes the portfolios with the
lowest standard deviation.
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Homework #73
8)
The line representing all combinations of portfolio expected returns and standard
deviations that can be constructed from two available assets is called the
A) efficient frontier.
B) capital allocation line.
C) Security Market Line.
D) risk/reward tradeoff line.
E) portfolio opportunity set.
9)
The global minimum variance portfolio formed from two risky securities will be riskless
when the correlation coefficient between the two securities is
A) 0.5.
B) any negative number.
C) 1.0.
D) 0.0.
E) ?1.0.
10)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
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Homework #73
5
0.20
15 %
8%
The expected rates of return of stocks A and B are _____ and _____, respectively.
A) 7.7%; 13.2%
B) 13.2%; 7.7%
C) 14%; 10%
D) 13.2%; 9%
11)
The standard deviation of a twoasset portfolio is a linear function of the assets’ weights
when
A) the assets have a correlation coefficient equal to one.
B) the assets have a correlation coefficient greater than zero.
C) the assets have a correlation coefficient equal to zero.
D) the assets have a correlation coefficient less than one.
E) the assets have a correlation coefficient less than zero.
12)
Security X has expected return of 14% and standard deviation of 22%. Security Y has
expected return of 16% and standard deviation of 28%. If the two securities have a correlation
coefficient of 0.8, what is their covariance?
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Homework #73
A) 0.018
B) 0.038
C) 0.013
D) 0.049
E) 0.054
13)
Which one of the following portfolios cannot lie on the efficient frontier as described by
Markowitz?
Portfolio
W
Expected Return Standard Deviation
9%
21 %
X
5%
7%
Y
15 %
36 %
Z
12 %
15 %
A) Only portfolio Y cannot lie on the efficient frontier.
B) Cannot be determined from the information given.
C) Only portfolio Z cannot lie on the efficient frontier.
D) Only portfolio X cannot lie on the efficient frontier.
E) Only portfolio W cannot lie on the efficient frontier.
14)
Consider the following probability distribution for stocks A and B:
State
Probability
Return on Stock A Return on Stock B
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Homework #73
1
0.15
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
The expected rates of return of stocks A and B are _____ and _____, respectively.
A) 13%; 8.4%
B) 13.2%; 7.7%
C) 13.2%; 9%
D) 7.7%; 13.2%
15)
When two risky securities that are positively correlated but not perfectly correlated are
held in a portfolio,
A) the portfolio standard deviation will be equal to the weighted average of the
individual security standard deviations.
B) the portfolio standard deviation will always be equal to the securities’ covariance.
C) the portfolio standard deviation will be less than the weighted average of the
individual security standard deviations.
D) the portfolio standard deviation will be greater than the weighted average of the
individual security standard deviations.
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Homework #73
16)
Two securities have a covariance of 0.0092. If their respective standard deviations are
23% and 31%, what is their correlation coefficient?
A) 0.95
B) 0.32
C) 0.45
D) 0.82
E) 0.129
17)
Consider the following probability distribution for stocks C and D:
State
1
Probability
0.30
Return on Stock C Return on Stock D
7%
? 9%
2
0.50
11 %
14 %
3
0.20
? 16 %
26 %
The expected rates of return of stocks C and D are _____ and _____, respectively.
A) 8.7%; 6.2%
B) 4.4%; 9.5%
C) 6.3%; 8.7%
D) None of the options are correct.
E) 9.5%; 4.4%
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Homework #73
18)
Consider the following probability distribution for stocks C and D:
State
1
Probability
0.30
Return on Stock C Return on Stock D
7%
? 9%
2
0.50
11 %
14 %
3
0.20
? 16 %
26 %
The coefficient of correlation between C and D is
A) 0.50.
B) None of the options are correct.
C) ?0.50.
D) 0.67.
E) ?0.67.
19)
Market risk is also referred to as
A) systematic risk or diversifiable risk.
B) systematic riskor nondiversifiable risk.
C) unique riskor nondiversifiable risk.
D) unique riskor diversifiable risk.
20)
Consider the following probability distribution for stocks A and B:
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Homework #73
State
1
Probability
0.15
Return on Stock A Return on Stock B
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
The standard deviations of stocks A and B are _____ and _____, respectively.
A) 3.22%; 2.01%
B) 1.56%; 1.99%
C) 2.45%; 1.66%
D) 1.54%; 1.11%
21)
A twoasset portfolio with a standard deviation of zero can be formed when
A) the assets have a correlation coefficient greater than zero.
B) the assets have a correlation coefficient equal to zero.
C) the assets have a correlation coefficient equal to one.
D) the assets have a correlation coefficient equal to negative one.
E) the assets have a correlation coefficient less than zero.
22)
Consider the following probability distribution for stocks C and D:
State
Probability
Return on Stock C Return on Stock D
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Homework #73
1
0.30
7%
? 9%
2
0.50
11 %
14 %
3
0.20
? 16 %
26 %
The standard deviations of stocks C and D are _____ and _____, respectively.
A) 11.24%; 7.62%
B) 10.35%; 12.93%
C) 12.93%; 10.35%
D) 7.62%; 11.24%
23)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
The coefficient of correlation between A and B is (Do not round intermediate calcuations.)
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Homework #73
A) 1.20.
B) 0.60.
C) 0.58.
D) 0.47.
24)
Diversifiable risk is also referred to as
A) systematic riskor market risk.
B) unique riskor market risk.
C) systematic riskor unique risk.
D) unique riskor firmspecific risk.
25)
The measure of risk in a Markowitz efficient frontier is
A) specific risk.
B) beta.
C) standard deviation of returns.
D) reinvestment risk.
26)
Firmspecific risk is also referred to as
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Homework #73
A) systematic riskor market risk.
B) diversifiable risk or unique risk.
C) diversifiable risk or market risk.
D) systematic riskor diversifiable risk.
27)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
Which of the following portfolio(s) is(are) on the efficient frontier?
A) The portfolio with 26 percent in A and 74 percent in B.
B) A and B are both on the efficient frontier.
C) The portfolio with 15 percent in A and 85 percent in B.
D) The portfolio with 20 percent in A and 80 percent in B.
E) The portfolio with 10 percent in A and 90 percent in B.
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Homework #73
28)
Which one of the following portfolios cannot lie on the efficient frontier as described by
Markowitz?
Portfolio
A
Expected Return Standard Deviation
10 %
12 %
B
5%
7%
C
15 %
20 %
D
12 %
25 %
A) Only portfolio D cannot lie on the efficient frontier.
B) Cannot be determined from the information given.
C) Only portfolio B cannot lie on the efficient frontier.
D) Only portfolio C cannot lie on the efficient frontier.
E) Only portfolio A cannot lie on the efficient frontier.
29)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
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Homework #73
The standard deviations of stocks A and B are _____ and _____, respectively.
A) 1.5%; 1.1%
B) 3.2%; 2.0%
C) 1.5%; 1.9%
D) 2.5%; 1.1%
30)
Which of the following is not a source of systematic risk?
A) The business cycle
B) Exchange rates
C) The inflation rate
D) Interest rates
E) Personnel changes
31)
Consider an investment opportunity set formed with two securities that are perfectly
negatively correlated. The globalminimum variance portfolio has a standard deviation that is
always
A) equal to ?1.
B) equal to the sum of the securities’ standard deviations.
C) equal to zero.
D) greater than zero.
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Homework #73
32)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.15
Return on Stock A Return on Stock B
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
If you invest 35% of your money in A and 65% in B, what would be your portfolio’s expected
rate of return and standard deviation?
A) 9.9%; 1.1%
B) 10%; 3%
C) 9.9%; 3%
D) 10%; 1.7%
33)
The standard deviation of a portfolio of risky securities is
A) the square root of the weighted sum of the securities’ variances and covariances.
B) the square root of the sum of the securities’ variances.
C) the square root of the sum of the securities’ covariances.
D) the square root of the weighted sum of the securities’ variances.
16
Homework #73
34)
Consider two perfectly negatively correlated risky securities A and B. A has an expected
rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8%
and a standard deviation of 12%.
The riskfree portfolio that can be formed with the two securities will earn a(n) _____ rate of
return.
A) 8.9%
B) 9.0%
C) 8.5%
D) 9.9%
35)
The individual investor’s optimal portfolio is designated by
A) the point of the highest reward to variability ratio in the indifference curve.
B) the point of highest reward to variability ratio in the opportunity set.
C) the point of tangency with the indifference curve and the capital allocation line.
D) the point of tangency with the opportunity set and the capital allocation line.
E) None of the options are correct.
36)
Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%,
and a risk free rate of 3%, what is the slope of the best feasible CAL?
A) 0.08
B) 0.64
C) 0.14
D) 0.36
E) 0.35
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Homework #73
37)
The risk that can be diversified away is
A) systematic risk.
B) beta.
C) firmspecific risk.
D) market risk.
38)
Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%,
and a risk free rate of 7%, what is the slope of the best feasible CAL?
A) 0.64
B) 0.62
C) 0.33
D) 0.54
E) 0.14
39)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.15
Return on Stock A Return on Stock B
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
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Homework #73
The coefficient of correlation between A and B is
A) 0.590.
B) 1.206.
C) 0.612.
D) 0.474.
40)
The separation property refers to the conclusion that
A) the choice of inputs to be used to determine the efficient frontier is objective, and the
choice of the best CAL is subjective.
B) the determination of the best risky portfolio is objective, and the choice of the best
complete portfolio is subjective.
C) the choice of the best complete portfolio is objective, and the determination of the
best risky portfolio is objective.
D) the determination of the best CAL is objective, and the choice of the inputs to be
used to determine the efficient frontier is subjective.
E) investors are separate beings and will, therefore, have different preferences regarding
the riskreturn tradeoff.
41)
Consider two perfectly negatively correlated risky securities A and B. A has an expected
rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8%
and a standard deviation of 12%.
The weights of A and B in the global minimum variance portfolio are _____ and _____,
respectively.
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Homework #73
A) 0.76; 0.24
B) 0.24; 0.76
C) 0.43; 0.57
D) 0.50; 0.50
E) 0.57; 0.43
42)
Nondiversifiable risk is also referred to as
A) systematic riskor unique risk.
B) unique riskor market risk.
C) systematic riskor market risk.
D) unique riskor firmspecific risk.
43)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
Let G be the global minimum variance portfolio. The weights of A and B in G are __________
and __________, respectively.
20
Homework #73
A) 0.34; 0.66
B) 0.40; 0.60
C) 0.66; 0.34
D) 0.77; 0.23
E) 0.23; 0.77
21
Advanced Investments
Homework #63
Student Name:__________ ID:__________ Date:__________
1)
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 Tbill that pays 5%. His portfolio’s expected return and
standard deviation are __________ and __________, respectively.
A) 0.087; 0.12
B) 0.110; 0.12
C) 0.295; 0.12
D) 0.087; 0.06
According to the meanvariance criterion, which of the statements below is correct?
2)
Investment
A
E(r)
10 %
Standard Deviation
5%
B
21 %
11 %
C
18 %
23 %
D
24 %
16 %
A) Investment D dominates all of the other investments.
B) Investment C dominates investment A.
C) Investment B dominates investment C.
D) Investment B dominates investment A.
E) Investment D dominates only investment B.
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Homework #63
3)
A rewardtovolatility ratio is useful in
A) measuring the standard deviation of returns.
B) analyzing returns on variablerate bonds.
C) None of the options are correct.
D) understanding how returns increase relative to risk increases.
E) assessing the effects of inflation.
4)
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?
A) E(r) = 0.15; Standard deviation = 0.20
B) E(r) = 0.10; Standard deviation = 0.10
C) E(r) = 0.10; Standard deviation = 0.20
D) E(r) = 0.20; Standard deviation = 0.15
E) E(r) = 0.15; Standard deviation = 0.10
5)
For capital investments where the forecasted return is above the investors required return
and below the capital market line, the investment is likely ________________.
A) overvalued
B) None of the options are correct
C) properly values
D) undervalued
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Homework #63
6)
Which of the following statements is(are) true?
1.I) Riskaverse investors reject investments that are fair games.
2.II) Riskneutral investors judge risky investments only by the expected returns.
3.III) Riskaverse investors judge investments only by their riskiness.
4.IV) Riskloving investors will not engage in fair games.
A) II, III, and IV only
B) I and II only
C) II and III only
D) I only
E) II only
7)
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 Tbill with a rate of return of 0.03.
What percentages of your money must be invested in the riskfree asset and the risky asset,
respectively, to form a portfolio with a standard deviation of 0.08?
A) Cannot be determined.
B) 40% and 60%
C) 60% and 40%
D) 50% and 50%
E) 30% and 70%
8)
In the meanstandard deviation graph, the line that connects the riskfree rate and the
optimal risky portfolio, P, is called
3
Homework #63
A) the indifference curve.
B) the investor’s utility line.
C) the security market line.
D) the capital allocation line.
9)
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 Tbill with a rate of return of 0.05.
What percentages of your money must be invested in the risky asset and the riskfree asset,
respectively, to form a portfolio with an expected return of 0.09?
A) Cannot be determined.
B) 75% and 25%
C) 85% and 15%
D) 67% and 33%
E) 57% and 43%
10)
In the meanstandard deviation graph, an indifference curve has a ________ slope.
A) zero
B) negative
C) positive
D) vertical
E) Cannot be determined.
4
Homework #63
11)
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 Tbill with a rate of return of 0.03.
The slope of the capital allocation line formed with the risky asset and the riskfree asset is equal
to
A) Cannot be determined.
B) 0.40.
C) 2.14.
D) 0.47.
E) 0.80.
12)
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 onemonth TBill rate as its intercept.
IV) uses a broad index of common stocks as its risky portfolio.
A) I, II, III, and IV
B) III and IV
C) II, III, and IV
D) I, II, and III
E) I, III, and IV
13)
Treasury bills are commonly viewed as riskfree assets because
5
Homework #63
A) their shortterm nature makes their values insensitive to interest rate fluctuations.
B) the inflation uncertainty over their time to maturity is negligible.
C) their shortterm nature makes their values insensitive to interest rate fluctuations, and
the inflation uncertainty over their time to maturity is negligible.
D) their term to maturity is identical to most investors’ desired holding periods.
E) the inflation uncertainty over their time to maturity is negligible, and their term to
maturity is identical to most investors’ desired holding periods.
14)
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 Tbill with a rate of return of 0.045.
What percentages of your money must be invested in the risky asset and the riskfree asset,
respectively, to form a portfolio with an expected return of 0.13?
A) ?30.77% and 130.77%
B) 67.67% and 33.33%
C) Cannot be determined.
D) 57.75% and 42.25%
E) 130.77% and ?30.77%
15)
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 60% in a Tbill that pays 6%. His portfolio’s expected return and
standard deviation are __________ and __________, respectively.
A) 0.087; 0.063
B) 0.088; 0.069
C) 0.114; 0.128
D) 0.295; 0.125
6
Homework #63
16)
You are considering investing $1,000 in a Tbill 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 Tbill and P, respectively?
A) Cannot be determined.
B) 0.65; 0.35
C) 0.50; 0.50
D) 0.25; 0.75
E) 0.19; 0.81
17)
Consider a Tbill 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 Tbill and any one of the four risky securities,
would a riskaverse investor always choose his portfolio?
A) The set of portfolios formed with the Tbill and security C.
B) The set of portfolios formed with the Tbill and security D.
C) The set of portfolios formed with the Tbill and security B.
D) The set of portfolios formed with the Tbill and security A.
E) Cannot be determined.
7
Homework #63
18)
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 Tbill with a rate of return of 0.045.
What percentages of your money must be invested in the riskfree asset and the risky asset,
respectively, to form a portfolio with a standard deviation of 0.08?
A) 30.1% and 69.9%
B) Cannot be determined.
C) 60.0% and 40.0%
D) 50.5% and 49.50%
E) 61.9% and 38.1%
19)
Use the below information to answer the following question.
Investment
1
Expected Return E(r) Standard Deviation
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?
8
Homework #63
A) 4
B) 3
C) Cannot be determined from the information given.
D) 2
E) 1
20)
You are considering investing $1,000 in a Tbill 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 value of your positions in X, Y, and the Tbills, respectively, if you
decide to hold a portfolio that has an expected outcome of $1,120?
A) $108; $514; $378
B) $568; $54; $378
C) Cannot be determined.
D) $378; $54; $568
E) $568; $378; $54
21)
The presence of risk means that
A) the standard deviation of the payoff is larger than its expected value.
B) investors will lose money.
C) more than one outcome is possible.
D) final wealth will be greater than initial wealth.
E) terminal wealth will be less than initial wealth.
9
Homework #63
22)
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 Tbill with a rate of return of 0.05.
What percentages of your money must be invested in the riskfree asset and the risky asset,
respectively, to form a portfolio with a standard deviation of 0.06?
A) 30% and 70%
B) Cannot be determined.
C) 60% and 40%
D) 50% and 50%
E) 40% and 60%
23)
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 Tbill with a rate of return of 0.03.
What percentages of your money must be invested in the risky asset and the riskfree asset,
respectively, to form a portfolio with an expected return of 0.08?
A) 62.5% and 37.5%
B) 85% and 15%
C) 57% and 43%
D) Cannot be determined.
E) 75% and 25%
24)
The first major step in asset allocation is
10
Homework #63
A) estimating security betas.
B) identifying market anomalies.
C) analyzing financial statements.
D) assessing risk tolerance.
25)
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.
A) 10%; 15%
B) 8%; 10%
C) 10%; 10%
D) 12%; 20%
26)
The reduction in standard deviation from a well diversified portfolio of 100 stocks will
______________ than that of a 200 stock portfolio.
A) be statistically significantly different
B) None of the options are correct
C) equal to
D) not be statistically significantly different
27)
Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky
assets (P) and TBills. The information below refers to these assets.
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Homework #63
E(Rp)
12.00 %
Standard Deviation of P
7.20 %
TBill rate
3.60 %
Proportion of Complete Portfolio in P
80 %
Proportion of Complete Portfolio in TBills
20 %
Composition of P:
Stock A
40.00 %
Stock B
25.00 %
Stock C
35.00 %
Total
100.00 %
What are the proportions of stocks A, B, and C, respectively, in Bo’s complete portfolio?
A) 20%, 12.5%, 17.5%
B) 16%, 10%, 14%
C) 32%, 20%, 28%
D) 40%, 25%, 35%
E) 8%, 5%, 7%
28)
In the meanstandard deviation graph, which one of the following statements is true
regarding the indifference curve of a riskaverse investor?
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Homework #63
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 offer the same utility according to returns and
standard deviations.
C) It connects portfolios that offer increasing utilities according to returns and standard
deviations.
D) None of the options are correct.
E) It is the locus of portfolios that have the same standard deviations and different rates
of return.
29)
The exact indifference curves of different investors
A) can be calculated precisely with the use of advanced calculus.
B) are known with perfect certainty and allow the advisor to create more suitable
portfolios for the client.
C) although not known with perfect certainty, do allow the advisor to create more
suitable portfolios for theclient.
D) cannot be known with perfect certainty.
30)
Asset allocation may involve
A) considerable security analysis.
B) the decision as to the allocation among different risky assets.
C) the decision as to the allocation between a riskfree asset and a risky asset and the
decision as to the allocation among different risky assets.
D) the decision as to the allocation between a riskfree asset and a risky asset.
E) the decision as to the allocation between a riskfree asset and a risky asset and
considerable security analysis.
13
Homework #63
31)
The utility score an investor assigns to a particular portfolio, other things equal,
A) will increase as the variance increases.
B) will decrease as the standard devi
Homework #73
Student Name:__________ ID:__________ Date:__________
1)
Nonsystematic risk is also referred to as
A) diversifiable risk or market risk.
B) market riskor diversifiable risk.
C) diversifiable risk or unique risk.
D) firmspecific risk or market risk.
2)
Which of the following statement(s) is(are) true regarding the variance of a portfolio of
two risky securities?
1.I) The higher the coefficient of correlation between securities, the greater the reduction in the
portfolio variance.
2.II) There is a linear relationship between the securities’ coefficient of correlation and the
portfolio variance.
3.III) The degree to which the portfolio variance is reduced depends on the degree of
correlation between securities.
A) I only
B) III only
C) II only
D) I and II
E) I and III
3)
The expected return of a portfolio of risky securities
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Homework #73
A) is a weighted average of the securities’ returns and the weighted sum of the securities’
variances and covariances.
B) is the sum of the securities’ returns.
C) is a weighted average of the securities’ returns.
D) is the weighted sum of the securities’ variances and covariances.
E) None of the options are correct.
4)
Which of the following statement(s) is(are) false regarding the selection of a portfolio
from those that lie on the capital allocation line?
1.I) Less riskaverse investors will invest more in the riskfree security and less in the optimal
risky portfolio than more riskaverse investors.
2.II) More riskaverse investors will invest less in the optimal risky portfolio and more in the
riskfree security than less riskaverse investors.
3.III) Investors choose the portfolio that maximizes their expected utility.
A) III only
B) I and II
C) I only
D) I and III
E) II only
5)
Security X has expected return of 12% and standard deviation of 18%. Security Y has
expected return of 15% and standard deviation of 26%. If the two securities have a correlation
coefficient of 0.7, what is their covariance?
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Homework #73
A) 0.054
B) 0.070
C) 0.018
D) 0.038
E) 0.033
6)
Given an optimal risky portfolio with expected return of 6%, standard deviation of 23%,
and a risk free rate of 3%, what is the slope of the best feasible CAL?
A) 0.64
B) 0.08
C) 0.13
D) 0.36
E) 0.39
7)
The efficient frontier of risky assets is
A) the portion of the minimumvariance portfolio that lies above the global minimum
variance portfolio.
B) the set of portfolios that have zero standard deviation.
C) the portion of the minimumvariance portfolio that represents the highest standard
deviations.
D) the portion of the minimumvariance portfolio that includes the portfolios with the
lowest standard deviation.
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Homework #73
8)
The line representing all combinations of portfolio expected returns and standard
deviations that can be constructed from two available assets is called the
A) efficient frontier.
B) capital allocation line.
C) Security Market Line.
D) risk/reward tradeoff line.
E) portfolio opportunity set.
9)
The global minimum variance portfolio formed from two risky securities will be riskless
when the correlation coefficient between the two securities is
A) 0.5.
B) any negative number.
C) 1.0.
D) 0.0.
E) ?1.0.
10)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
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Homework #73
5
0.20
15 %
8%
The expected rates of return of stocks A and B are _____ and _____, respectively.
A) 7.7%; 13.2%
B) 13.2%; 7.7%
C) 14%; 10%
D) 13.2%; 9%
11)
The standard deviation of a twoasset portfolio is a linear function of the assets’ weights
when
A) the assets have a correlation coefficient equal to one.
B) the assets have a correlation coefficient greater than zero.
C) the assets have a correlation coefficient equal to zero.
D) the assets have a correlation coefficient less than one.
E) the assets have a correlation coefficient less than zero.
12)
Security X has expected return of 14% and standard deviation of 22%. Security Y has
expected return of 16% and standard deviation of 28%. If the two securities have a correlation
coefficient of 0.8, what is their covariance?
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Homework #73
A) 0.018
B) 0.038
C) 0.013
D) 0.049
E) 0.054
13)
Which one of the following portfolios cannot lie on the efficient frontier as described by
Markowitz?
Portfolio
W
Expected Return Standard Deviation
9%
21 %
X
5%
7%
Y
15 %
36 %
Z
12 %
15 %
A) Only portfolio Y cannot lie on the efficient frontier.
B) Cannot be determined from the information given.
C) Only portfolio Z cannot lie on the efficient frontier.
D) Only portfolio X cannot lie on the efficient frontier.
E) Only portfolio W cannot lie on the efficient frontier.
14)
Consider the following probability distribution for stocks A and B:
State
Probability
Return on Stock A Return on Stock B
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Homework #73
1
0.15
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
The expected rates of return of stocks A and B are _____ and _____, respectively.
A) 13%; 8.4%
B) 13.2%; 7.7%
C) 13.2%; 9%
D) 7.7%; 13.2%
15)
When two risky securities that are positively correlated but not perfectly correlated are
held in a portfolio,
A) the portfolio standard deviation will be equal to the weighted average of the
individual security standard deviations.
B) the portfolio standard deviation will always be equal to the securities’ covariance.
C) the portfolio standard deviation will be less than the weighted average of the
individual security standard deviations.
D) the portfolio standard deviation will be greater than the weighted average of the
individual security standard deviations.
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Homework #73
16)
Two securities have a covariance of 0.0092. If their respective standard deviations are
23% and 31%, what is their correlation coefficient?
A) 0.95
B) 0.32
C) 0.45
D) 0.82
E) 0.129
17)
Consider the following probability distribution for stocks C and D:
State
1
Probability
0.30
Return on Stock C Return on Stock D
7%
? 9%
2
0.50
11 %
14 %
3
0.20
? 16 %
26 %
The expected rates of return of stocks C and D are _____ and _____, respectively.
A) 8.7%; 6.2%
B) 4.4%; 9.5%
C) 6.3%; 8.7%
D) None of the options are correct.
E) 9.5%; 4.4%
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Homework #73
18)
Consider the following probability distribution for stocks C and D:
State
1
Probability
0.30
Return on Stock C Return on Stock D
7%
? 9%
2
0.50
11 %
14 %
3
0.20
? 16 %
26 %
The coefficient of correlation between C and D is
A) 0.50.
B) None of the options are correct.
C) ?0.50.
D) 0.67.
E) ?0.67.
19)
Market risk is also referred to as
A) systematic risk or diversifiable risk.
B) systematic riskor nondiversifiable risk.
C) unique riskor nondiversifiable risk.
D) unique riskor diversifiable risk.
20)
Consider the following probability distribution for stocks A and B:
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Homework #73
State
1
Probability
0.15
Return on Stock A Return on Stock B
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
The standard deviations of stocks A and B are _____ and _____, respectively.
A) 3.22%; 2.01%
B) 1.56%; 1.99%
C) 2.45%; 1.66%
D) 1.54%; 1.11%
21)
A twoasset portfolio with a standard deviation of zero can be formed when
A) the assets have a correlation coefficient greater than zero.
B) the assets have a correlation coefficient equal to zero.
C) the assets have a correlation coefficient equal to one.
D) the assets have a correlation coefficient equal to negative one.
E) the assets have a correlation coefficient less than zero.
22)
Consider the following probability distribution for stocks C and D:
State
Probability
Return on Stock C Return on Stock D
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Homework #73
1
0.30
7%
? 9%
2
0.50
11 %
14 %
3
0.20
? 16 %
26 %
The standard deviations of stocks C and D are _____ and _____, respectively.
A) 11.24%; 7.62%
B) 10.35%; 12.93%
C) 12.93%; 10.35%
D) 7.62%; 11.24%
23)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
The coefficient of correlation between A and B is (Do not round intermediate calcuations.)
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Homework #73
A) 1.20.
B) 0.60.
C) 0.58.
D) 0.47.
24)
Diversifiable risk is also referred to as
A) systematic riskor market risk.
B) unique riskor market risk.
C) systematic riskor unique risk.
D) unique riskor firmspecific risk.
25)
The measure of risk in a Markowitz efficient frontier is
A) specific risk.
B) beta.
C) standard deviation of returns.
D) reinvestment risk.
26)
Firmspecific risk is also referred to as
12
Homework #73
A) systematic riskor market risk.
B) diversifiable risk or unique risk.
C) diversifiable risk or market risk.
D) systematic riskor diversifiable risk.
27)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
Which of the following portfolio(s) is(are) on the efficient frontier?
A) The portfolio with 26 percent in A and 74 percent in B.
B) A and B are both on the efficient frontier.
C) The portfolio with 15 percent in A and 85 percent in B.
D) The portfolio with 20 percent in A and 80 percent in B.
E) The portfolio with 10 percent in A and 90 percent in B.
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Homework #73
28)
Which one of the following portfolios cannot lie on the efficient frontier as described by
Markowitz?
Portfolio
A
Expected Return Standard Deviation
10 %
12 %
B
5%
7%
C
15 %
20 %
D
12 %
25 %
A) Only portfolio D cannot lie on the efficient frontier.
B) Cannot be determined from the information given.
C) Only portfolio B cannot lie on the efficient frontier.
D) Only portfolio C cannot lie on the efficient frontier.
E) Only portfolio A cannot lie on the efficient frontier.
29)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
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Homework #73
The standard deviations of stocks A and B are _____ and _____, respectively.
A) 1.5%; 1.1%
B) 3.2%; 2.0%
C) 1.5%; 1.9%
D) 2.5%; 1.1%
30)
Which of the following is not a source of systematic risk?
A) The business cycle
B) Exchange rates
C) The inflation rate
D) Interest rates
E) Personnel changes
31)
Consider an investment opportunity set formed with two securities that are perfectly
negatively correlated. The globalminimum variance portfolio has a standard deviation that is
always
A) equal to ?1.
B) equal to the sum of the securities’ standard deviations.
C) equal to zero.
D) greater than zero.
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Homework #73
32)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.15
Return on Stock A Return on Stock B
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
If you invest 35% of your money in A and 65% in B, what would be your portfolio’s expected
rate of return and standard deviation?
A) 9.9%; 1.1%
B) 10%; 3%
C) 9.9%; 3%
D) 10%; 1.7%
33)
The standard deviation of a portfolio of risky securities is
A) the square root of the weighted sum of the securities’ variances and covariances.
B) the square root of the sum of the securities’ variances.
C) the square root of the sum of the securities’ covariances.
D) the square root of the weighted sum of the securities’ variances.
16
Homework #73
34)
Consider two perfectly negatively correlated risky securities A and B. A has an expected
rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8%
and a standard deviation of 12%.
The riskfree portfolio that can be formed with the two securities will earn a(n) _____ rate of
return.
A) 8.9%
B) 9.0%
C) 8.5%
D) 9.9%
35)
The individual investor’s optimal portfolio is designated by
A) the point of the highest reward to variability ratio in the indifference curve.
B) the point of highest reward to variability ratio in the opportunity set.
C) the point of tangency with the indifference curve and the capital allocation line.
D) the point of tangency with the opportunity set and the capital allocation line.
E) None of the options are correct.
36)
Given an optimal risky portfolio with expected return of 12%, standard deviation of 26%,
and a risk free rate of 3%, what is the slope of the best feasible CAL?
A) 0.08
B) 0.64
C) 0.14
D) 0.36
E) 0.35
17
Homework #73
37)
The risk that can be diversified away is
A) systematic risk.
B) beta.
C) firmspecific risk.
D) market risk.
38)
Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%,
and a risk free rate of 7%, what is the slope of the best feasible CAL?
A) 0.64
B) 0.62
C) 0.33
D) 0.54
E) 0.14
39)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.15
Return on Stock A Return on Stock B
8%
8%
2
0.20
13 %
7%
3
0.15
12 %
6%
4
0.30
14 %
9%
5
0.20
16 %
11 %
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Homework #73
The coefficient of correlation between A and B is
A) 0.590.
B) 1.206.
C) 0.612.
D) 0.474.
40)
The separation property refers to the conclusion that
A) the choice of inputs to be used to determine the efficient frontier is objective, and the
choice of the best CAL is subjective.
B) the determination of the best risky portfolio is objective, and the choice of the best
complete portfolio is subjective.
C) the choice of the best complete portfolio is objective, and the determination of the
best risky portfolio is objective.
D) the determination of the best CAL is objective, and the choice of the inputs to be
used to determine the efficient frontier is subjective.
E) investors are separate beings and will, therefore, have different preferences regarding
the riskreturn tradeoff.
41)
Consider two perfectly negatively correlated risky securities A and B. A has an expected
rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8%
and a standard deviation of 12%.
The weights of A and B in the global minimum variance portfolio are _____ and _____,
respectively.
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Homework #73
A) 0.76; 0.24
B) 0.24; 0.76
C) 0.43; 0.57
D) 0.50; 0.50
E) 0.57; 0.43
42)
Nondiversifiable risk is also referred to as
A) systematic riskor unique risk.
B) unique riskor market risk.
C) systematic riskor market risk.
D) unique riskor firmspecific risk.
43)
Consider the following probability distribution for stocks A and B:
State
1
Probability
0.10
Return on Stock A Return on Stock B
10 %
8%
2
0.20
13 %
7%
3
0.20
12 %
6%
4
0.30
14 %
9%
5
0.20
15 %
8%
Let G be the global minimum variance portfolio. The weights of A and B in G are __________
and __________, respectively.
20
Homework #73
A) 0.34; 0.66
B) 0.40; 0.60
C) 0.66; 0.34
D) 0.77; 0.23
E) 0.23; 0.77
21
Advanced Investments
Homework #63
Student Name:__________ ID:__________ Date:__________
1)
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 Tbill that pays 5%. His portfolio’s expected return and
standard deviation are __________ and __________, respectively.
A) 0.087; 0.12
B) 0.110; 0.12
C) 0.295; 0.12
D) 0.087; 0.06
According to the meanvariance criterion, which of the statements below is correct?
2)
Investment
A
E(r)
10 %
Standard Deviation
5%
B
21 %
11 %
C
18 %
23 %
D
24 %
16 %
A) Investment D dominates all of the other investments.
B) Investment C dominates investment A.
C) Investment B dominates investment C.
D) Investment B dominates investment A.
E) Investment D dominates only investment B.
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Homework #63
3)
A rewardtovolatility ratio is useful in
A) measuring the standard deviation of returns.
B) analyzing returns on variablerate bonds.
C) None of the options are correct.
D) understanding how returns increase relative to risk increases.
E) assessing the effects of inflation.
4)
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?
A) E(r) = 0.15; Standard deviation = 0.20
B) E(r) = 0.10; Standard deviation = 0.10
C) E(r) = 0.10; Standard deviation = 0.20
D) E(r) = 0.20; Standard deviation = 0.15
E) E(r) = 0.15; Standard deviation = 0.10
5)
For capital investments where the forecasted return is above the investors required return
and below the capital market line, the investment is likely ________________.
A) overvalued
B) None of the options are correct
C) properly values
D) undervalued
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Homework #63
6)
Which of the following statements is(are) true?
1.I) Riskaverse investors reject investments that are fair games.
2.II) Riskneutral investors judge risky investments only by the expected returns.
3.III) Riskaverse investors judge investments only by their riskiness.
4.IV) Riskloving investors will not engage in fair games.
A) II, III, and IV only
B) I and II only
C) II and III only
D) I only
E) II only
7)
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 Tbill with a rate of return of 0.03.
What percentages of your money must be invested in the riskfree asset and the risky asset,
respectively, to form a portfolio with a standard deviation of 0.08?
A) Cannot be determined.
B) 40% and 60%
C) 60% and 40%
D) 50% and 50%
E) 30% and 70%
8)
In the meanstandard deviation graph, the line that connects the riskfree rate and the
optimal risky portfolio, P, is called
3
Homework #63
A) the indifference curve.
B) the investor’s utility line.
C) the security market line.
D) the capital allocation line.
9)
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 Tbill with a rate of return of 0.05.
What percentages of your money must be invested in the risky asset and the riskfree asset,
respectively, to form a portfolio with an expected return of 0.09?
A) Cannot be determined.
B) 75% and 25%
C) 85% and 15%
D) 67% and 33%
E) 57% and 43%
10)
In the meanstandard deviation graph, an indifference curve has a ________ slope.
A) zero
B) negative
C) positive
D) vertical
E) Cannot be determined.
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Homework #63
11)
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 Tbill with a rate of return of 0.03.
The slope of the capital allocation line formed with the risky asset and the riskfree asset is equal
to
A) Cannot be determined.
B) 0.40.
C) 2.14.
D) 0.47.
E) 0.80.
12)
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 onemonth TBill rate as its intercept.
IV) uses a broad index of common stocks as its risky portfolio.
A) I, II, III, and IV
B) III and IV
C) II, III, and IV
D) I, II, and III
E) I, III, and IV
13)
Treasury bills are commonly viewed as riskfree assets because
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Homework #63
A) their shortterm nature makes their values insensitive to interest rate fluctuations.
B) the inflation uncertainty over their time to maturity is negligible.
C) their shortterm nature makes their values insensitive to interest rate fluctuations, and
the inflation uncertainty over their time to maturity is negligible.
D) their term to maturity is identical to most investors’ desired holding periods.
E) the inflation uncertainty over their time to maturity is negligible, and their term to
maturity is identical to most investors’ desired holding periods.
14)
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 Tbill with a rate of return of 0.045.
What percentages of your money must be invested in the risky asset and the riskfree asset,
respectively, to form a portfolio with an expected return of 0.13?
A) ?30.77% and 130.77%
B) 67.67% and 33.33%
C) Cannot be determined.
D) 57.75% and 42.25%
E) 130.77% and ?30.77%
15)
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 60% in a Tbill that pays 6%. His portfolio’s expected return and
standard deviation are __________ and __________, respectively.
A) 0.087; 0.063
B) 0.088; 0.069
C) 0.114; 0.128
D) 0.295; 0.125
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Homework #63
16)
You are considering investing $1,000 in a Tbill 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 Tbill and P, respectively?
A) Cannot be determined.
B) 0.65; 0.35
C) 0.50; 0.50
D) 0.25; 0.75
E) 0.19; 0.81
17)
Consider a Tbill 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 Tbill and any one of the four risky securities,
would a riskaverse investor always choose his portfolio?
A) The set of portfolios formed with the Tbill and security C.
B) The set of portfolios formed with the Tbill and security D.
C) The set of portfolios formed with the Tbill and security B.
D) The set of portfolios formed with the Tbill and security A.
E) Cannot be determined.
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18)
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 Tbill with a rate of return of 0.045.
What percentages of your money must be invested in the riskfree asset and the risky asset,
respectively, to form a portfolio with a standard deviation of 0.08?
A) 30.1% and 69.9%
B) Cannot be determined.
C) 60.0% and 40.0%
D) 50.5% and 49.50%
E) 61.9% and 38.1%
19)
Use the below information to answer the following question.
Investment
1
Expected Return E(r) Standard Deviation
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?
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A) 4
B) 3
C) Cannot be determined from the information given.
D) 2
E) 1
20)
You are considering investing $1,000 in a Tbill 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 value of your positions in X, Y, and the Tbills, respectively, if you
decide to hold a portfolio that has an expected outcome of $1,120?
A) $108; $514; $378
B) $568; $54; $378
C) Cannot be determined.
D) $378; $54; $568
E) $568; $378; $54
21)
The presence of risk means that
A) the standard deviation of the payoff is larger than its expected value.
B) investors will lose money.
C) more than one outcome is possible.
D) final wealth will be greater than initial wealth.
E) terminal wealth will be less than initial wealth.
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Homework #63
22)
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 Tbill with a rate of return of 0.05.
What percentages of your money must be invested in the riskfree asset and the risky asset,
respectively, to form a portfolio with a standard deviation of 0.06?
A) 30% and 70%
B) Cannot be determined.
C) 60% and 40%
D) 50% and 50%
E) 40% and 60%
23)
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 Tbill with a rate of return of 0.03.
What percentages of your money must be invested in the risky asset and the riskfree asset,
respectively, to form a portfolio with an expected return of 0.08?
A) 62.5% and 37.5%
B) 85% and 15%
C) 57% and 43%
D) Cannot be determined.
E) 75% and 25%
24)
The first major step in asset allocation is
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Homework #63
A) estimating security betas.
B) identifying market anomalies.
C) analyzing financial statements.
D) assessing risk tolerance.
25)
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.
A) 10%; 15%
B) 8%; 10%
C) 10%; 10%
D) 12%; 20%
26)
The reduction in standard deviation from a well diversified portfolio of 100 stocks will
______________ than that of a 200 stock portfolio.
A) be statistically significantly different
B) None of the options are correct
C) equal to
D) not be statistically significantly different
27)
Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky
assets (P) and TBills. The information below refers to these assets.
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E(Rp)
12.00 %
Standard Deviation of P
7.20 %
TBill rate
3.60 %
Proportion of Complete Portfolio in P
80 %
Proportion of Complete Portfolio in TBills
20 %
Composition of P:
Stock A
40.00 %
Stock B
25.00 %
Stock C
35.00 %
Total
100.00 %
What are the proportions of stocks A, B, and C, respectively, in Bo’s complete portfolio?
A) 20%, 12.5%, 17.5%
B) 16%, 10%, 14%
C) 32%, 20%, 28%
D) 40%, 25%, 35%
E) 8%, 5%, 7%
28)
In the meanstandard deviation graph, which one of the following statements is true
regarding the indifference curve of a riskaverse investor?
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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 offer the same utility according to returns and
standard deviations.
C) It connects portfolios that offer increasing utilities according to returns and standard
deviations.
D) None of the options are correct.
E) It is the locus of portfolios that have the same standard deviations and different rates
of return.
29)
The exact indifference curves of different investors
A) can be calculated precisely with the use of advanced calculus.
B) are known with perfect certainty and allow the advisor to create more suitable
portfolios for the client.
C) although not known with perfect certainty, do allow the advisor to create more
suitable portfolios for theclient.
D) cannot be known with perfect certainty.
30)
Asset allocation may involve
A) considerable security analysis.
B) the decision as to the allocation among different risky assets.
C) the decision as to the allocation between a riskfree asset and a risky asset and the
decision as to the allocation among different risky assets.
D) the decision as to the allocation between a riskfree asset and a risky asset.
E) the decision as to the allocation between a riskfree asset and a risky asset and
considerable security analysis.
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31)
The utility score an investor assigns to a particular portfolio, other things equal,
A) will increase as the variance increases.
B) will decrease as the standard devi
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