expected
The
investment
return an asset is
to yield in excess of the risk free rate of return
risk premium
Week 8 Practice Questions
1. Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor _______.
A. is normally risk neutral
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B. requires a risk premium to take on the risk
C. knows he or she will not lose money
D. knows the outcomes at the beginning of the holding period
2. Consider the following two investment alternatives: First, a risky portfolio that pays
a 15% rate of return with a probability of 40% or a 5% rate of return with a
probability of 60%. Second, a Treasury bill that pays 6%. Compute the risk premium
on the risky investment.
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0.09
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0.09 94
0.03 13
006
3. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a
risky asset with an expected rate of return of 16% and a standard deviation of 20%
and a Treasury bill with a rate of return of 6%. Compute the slope of the capital
allocation line formed with the risky asset and the risk-free asset.
Slope
of CAL
Sharp ratio
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162
0.5
20
0
4. You have $500,000 available to invest. The risk-free rate, as well as your borrowing
rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return,
you should _________.
81
A. invest $125,000 in the risk-free asset
84
4187
221
B. invest $375,000 in the risk-free asset
8
2
221
C. borrow $125,000
D. borrow $375,000
500,0001 0.75
8
14
8
037541.75
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89
84
4
borrowing
1
5. Two assets have the following
expected returns and standard deviations when the
00.75
risk-free rate is 5%:
y
KAE
KELA
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An investor with a risk aversion of A = 3 would find that _________________ on a
risk-return basis.
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10
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B. only asset B is acceptable
1
0.047
C. neither asset A nor asset B is acceptable
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A. only asset A is acceptable
D. both asset A and asset B are acceptable
4.065
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6. You are considering investing $1,000 in a complete portfolio. The complete portfolio
is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with
two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%,
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. To form a complete portfolio with an expected rate of return of 11%,
you should invest __________ of your complete portfolio in Treasury bills.
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A. 19%
B. 25%
C. 36%
119
D. 50%
64
47 12.41
17.4 74
81
4
1
19
1
41151
y
7. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk
aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation
of 24% only if the risky portfolio's expected return is at least ______.
000
yet
A. 8.67%
B. 9.84%
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C. 21.28%
D. 14.68%
4
36245
041.28
21.28
EERIE
41
50
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