investment chapter6(3)

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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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

42. The change from a straight to a kinked capital allocation line is a result of: A. reward-to-volatility ratio increasing. B. borrowing rate exceeding lending rate. C. an investor's risk tolerance decreasing.

D. increase in the portfolio proportion of the risk-free asset. E. a flawed theory.

43. The first major step in asset allocation is: A. assessing risk tolerance.

B. analyzing financial statements. C. estimating security betas. D. identifying market anomalies.

E. determining how much money a client needs to make.

44. Based on their relative degrees of risk tolerance

A. investors will hold varying amounts of the risky asset in their portfolios. B. all investors will have the same portfolio asset allocations.

C. investors will hold varying amounts of the risk-free asset in their portfolios.

D. investors will hold varying amounts of the risky asset and the risk-free asset in their portfolios.

E. investors would perform vastly different levels of security analysis.

45. Asset allocation

A. may involve the decision as to the allocation between a risk-free asset and a risky asset only. B. may involve the decision as to the allocation among different risky assets only. C. may involve considerable security analysis.

D. may involve the decision as to the allocation between a risk-free asset and a risky asset and may involve the decision as to the allocation among different risky assets.

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

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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

46. In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called ______________. A. the Security Market Line B. the Capital Allocation Line C. the Indifference Curve D. the investor's utility line E. skewness

47. Treasury bills are commonly viewed as risk-free assets because

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. both their short-term nature makes their values insensitive to interest rate fluctuations and the inflation uncertainty over their time to maturity is negligible.

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

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.

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