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Exam 6: Capital Allocation to Risky Assets

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Question 21

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The capital allocation line can be described as the

A) investment opportunity set formed with a risky asset and a risk-free asset.
B) investment opportunity set formed with two risky assets.
C) line on which lie all portfolios that offer the same utility to a particular investor.
D) line on which lie all portfolios with the same expected rate of return and different standard deviations.

E) C) and D)
F) None of the above

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Question 22

Multiple Choice

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

A) negative
B) zero
C) positive
D) vertical
E) Cannot be determined.

F) None of the above
G) B) and C)

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Question 23

Multiple Choice

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Given the capital allocation line, an investor's optimal portfolio is the portfolio that

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. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

You are considering investing $1,000 in a T-bill 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 T-bill and P, respectively?

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. 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 0.06?

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 T-bill with a rate of return of 0.03. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.08?

In a return-standard deviation space, which of the following statements is(are) true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) I) An investor's own indifference curves might intersect.II) Indifference curves have negative slopes.III) In a set of indifference curves, the highest offers the greatest utility.IV) Indifference curves of two investors might intersect.

You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.11?

Steve is more risk-averse than Edie. On a graph that shows Steve and Edie's indifference curves, which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis. I) Steve and Edie's indifference curves might intersect. II. Steve's indifference curves will have flatter slopes than Edie's. III. Steve's indifference curves will have steeper slopes than Edie's. IV. Steve and Edie's indifference curves will not intersect. V. Steve's indifference curves will be downward sloping, and Edie's will be upward sloping.

In the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called

You are considering investing $1,000 in a T-bill 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 T-bills, respectively, if you decide to hold a portfolio that has an expected outcome of $1,120?

The utility score an investor assigns to a particular portfolio, other things equal,

For capital investments where the forecasted return is below the investor's required return and above the capital market line, the investment is likely ________________.

Use the below information to answer the following question. $\begin{array}{llcc}\text { Investment } &\text { Expected Return } E(r) &\text { Standard Deviation }\\1&0.12&0.13\\2&0.15&0.15\\3&0.21&0.16\\4&0.24&0.21\\\end{array}$ U = E(r) ? (A/2) s², where A = 4.0. The variable (A) in the utility function represents the

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. A portfolio that has an expected outcome of $114 is formed by

Asset allocation may involve

The exact indifference curves of different investors

For capital investments where the forecasted return is above the investor's required return and below the capital market line, the investment is likely ________________.

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. \begin{array}{lc} \text {E(Pp) } &12.00\%\\ \text { Standard Deviation of \mathrm{P} } &7.20\%\\ \text { T-Bill rate } &3.60\%\\\\ \text { Proportion of Complete Portfolio in P } &80\%\\ \text { Proportion of Complete Portfolio in T-Bills } &20\%\\\end{array} $\text { Composition of P: }$ $\begin{array}{cc} \text { Stock A} &40.00\%\\ \text { Stock B} &25.00\%&\\ \text { Stock C} &\underline{35.00\%}\\ \text { Total} &\underline{100.00\%}\\\end{array}$ What are the proportions of stocks A, B, and C, respectively, in Bo's complete portfolio?