1 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.
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 0.08?
a. 301% and 69.9%
b. 50.5% and 49.50%
c. 60.0% and 40.0%
d. 61.9% and 38.1%
e. Cannot be determined
2 The presence of risk means that
a. more than one outcome is possible.
b. investors will lose money.
c. final wealth will be greater than initial wealth.
d. the standard deviation of the payoff is larger than its expected value.
e. terminal wealth will be less than initial wealth.
3An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.15 and a
variance of 0.04 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation
are _____ and _____, respectively.
a. 0.114; 0.12
b. 0.087; 0.06
c. 0.295; 0.06
d. 0.087; 0.12
e. None of the options
4You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20
and a T-bill with a rate of return of 0.03.
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 0.08??
a. 30% and 70%
b. 50% and 50%
c. 60% and 40%
d. 40% and 60%
e. Cannot be determined
5In the mean-standard deviation graph an indifference curve has a _____ slope.
a. vertical
b. zero
c. positive
d. negative
e. cannot be determined
6 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.
E(Rp)
12.00%
Standard Deviation of P
7.20%
T-Bill rate
3.60%
Proportion of Complete Portfolio in P
Proportion of Complete Portfolio in T-Bills
80%
20%
Composition of P:
Stock A
40.00%
Stock B
25.00%
Stock C
35.00%
Total
100.0%
What is the standard deviation of Bo's complete portfolio?
a. 5.40%
b. 4.98%
c. 6.92%
d. 7.20%
e. 5.76%
7 According to the mean-variance criterion, which of the statements below is correct?
Investment
E(r)
A
B
C
D
10%
21%
18%
24%
Investment D dominates only
investment B.
a.
b.
Investment B dominates
investment A.
c.
Investment C dominates
investment A.
d.
Investment B dominates
investment C.
e.
Investment D dominates all of
the other investments.
Standard
Deviation
5%
11%
23%
16%
8 The riskiness of individual assets
a. 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.
b. should be considered for the asset in isolation.
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.
Question 9
Assume an investor with the following utility function: U = E(r) - 3/2(s2).
To maximize her expected utility, which one of the following investment alternatives would she choose?
a.
A portfolio that pays 10% with 40% probability or 5% with a 60% probability.
b.
A portfolio that pays 12% with 60% probability or 5% with 40% probability.
c.
A portfolio that pays 10% with a 60% probability or 5% with 40% probability.
d.
A portfolio that pays 12% with 40% probability or 5% with 60% probability.
Question 10
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.
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
Question 11
Which of the following statement(s) is(are) false regarding the variance of a portfolio of two risky
securities?
I) The higher the coefficient of correlation between securities, the greater the reduction in the portfolio
variance.
II) There is a linear relationship between the securities' coefficient of correlation and the portfolio variance.
III) The degree to which the portfolio variance is reduced depends on the degree of correlation between
securities.
a. I only
b. II only
c. III only
d. I and II
e. I and III
Question 12
Consider the following probability distribution for stocks A and B:
State
1
2
3
Probability
0.10
0.20
0.20
Return on Stock A
10%
13%
12%
Return on Stock B
8%
7%
6%
4
0.30
14%
9%
5
0.20
15%
8%
The expected rates of return of stocks A and B are _____ and _____, respectively.
a. 13.2%; 7.7%
b. 14%; 10%
c. 13.2%; 9%
d. 7.7%; 13.2%
Question 13
Given an optimal risky portfolio with expected return of 20% and standard deviation of 24% and a risk free
rate of 7%, what is the slope of the best feasible CAL?
a. 0.14
b. 0.62
c. 0.33
d. 0.54
e. 0.64
Question 14
Given an optimal risky portfolio with expected return of 12% and standard deviation of 26% and a risk free
rate of 5%, what is the slope of the best feasible CAL?
a. 0.27
b. 0.08
c. 0.64
d. 0.36
e. 0.33
Question 15
The efficient frontier of risky assets is
a. the portion of the investment opportunity set that represents the highest standard deviations.
b. the set of portfolios that have zero standard deviation.
c. the portion of the investment opportunity set that includes the portfolios with the lowest standard
deviation.
d. the portion of the investment opportunity set that lies above the global minimum variance portfolio.
Question 16
Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on
the capital allocation line?
I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio
than more risk-averse investors.
II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security
than less risk-averse investors.
III) Investors choose the portfolio that maximizes their expected utility.
a. I only
b. II only
c. III only
d. I and III
e. II and III
Question 17
Security X has expected return of 7% and standard deviation of 14%. Security Y has expected return of
11% and standard deviation of 22%. If the two securities have a correlation coefficient of -0.45, what is
their covariance?
a. 0.0184
b. -0.1512
c. -0.0108
d. -0.0139
e. 0.0388
Question 18
Consider the following probability distribution for stocks A and B:
State Probability
Return on Stock A
Return on Stock B
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. 13.2%; 9%
b. 7.7%; 13.2%
c. 13%; 8.4%
d. 13.2%; 7.7%
Question 19
Consider the following probability distribution for stocks A and B:
State Probability
Return on Stock A
Return on Stock B
1
0.10
10%
8%
2
0.20
13%
7%
3
0.20
12%
6%
4
0.30
14%
9%
5
0.20
15%
8%
If you invest 40% of your money in A and 60% in B, what would be your portfolio's expected rate of return
and standard deviation?
a. 9.9%; 3%
b. 9.9%; 1.1%
c. 11%; 1.1%
d. 11%; 3%
e. None of the options
Question 20
Security M has expected return of 17% and standard deviation of 32%. Security S has expected return of
13% and standard deviation of 19%. If the two securities have a correlation coefficient of 0.78, what is
their covariance?
a. 0.049
b. 0.038
c. 0.054
d. 0.047
e. 0.045