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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) none of these

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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 one-month T-Bill rate as its intercept IV.uses a broad index of common stocks as its risky portfolio


A) I,III,and IV
B) II,III,and IV
C) III and IV
D) I,II,and III
E) I,II,III,and IV

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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 percent with a 60 percent probability or 5 percent with 40 percent probability.
B) A portfolio that pays 10 percent with 40 percent probability or 5 percent with a 60 percent probability.
C) A portfolio that pays 12 percent with 60 percent probability or 5 percent with 40 percent probability.
D) A portfolio that pays 12 percent with 40 percent probability or 5 percent with 60 percent probability.
E) none of these.

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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

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Discuss the differences between investors who are risk averse,risk neutral,and risk loving.

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The investor who is risk averse will tak...

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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 a and b are true.
E) both b and c are true.

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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?


A) 30% and 70%
B) 50% and 50%
C) 60% and 40%
D) 40% and 60%
E) cannot be determined

Correct Answer

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The presence of risk means that


A) Investors will lose money.
B) More than one outcome is possible.
C) the standard deviation of the payoff is larger than its expected value.
D) Final wealth will be greater than initial wealth.
E) Terminal wealth will be less than initial wealth.

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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 risky asset and the risk-free asset,respectively,to form a portfolio with an expected return of 0.09?


A) 85% and 15%
B) 75% and 25%
C) 67% and 33%
D) 57% and 43%
E) cannot be determined

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Draw graphs that represent indifference curves for the following investors: Harry,who is a risk-averse investor;Eddie,who is a risk-neutral investor;and Ozzie,who is a risk-loving investor.Discuss the nature of each curve and the reasons for its shape.

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The graph for Harry should show upward-s...

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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) a and c.
E) none of these.

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The certainty equivalent rate of a portfolio is


A) the rate that a risk-free investment would need to offer with certainty to be considered equally attractive as the risky portfolio.
B) the rate that the investor must earn for certain to give up the use of his money.
C) the minimum rate guaranteed by institutions such as banks.
D) the rate that equates "A" in the utility function with the average risk aversion coefficient for all risk-averse investors.
E) represented by the scaling factor "-.005" in the utility function.

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When a portfolio consists of only a risky asset and a riskless asset,increasing the fraction of the overall portfolio invested in the risky asset will


A) increase the expected return on the portfolio.
B) increase the standard deviation of the portfolio.
C) not change the risk-reward ratio.
D) neither a,b nor c are true.
E) a,b and c are all true.

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In the mean-standard deviation graph,which one of the following statements is true regarding the indifference curve of a risk-averse investor?


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 have the same standard deviations and different rates of return.
C) It is the locus of portfolios that offer the same utility according to returns and standard deviations.
D) It connects portfolios that offer increasing utilities according to returns and standard deviations.
E) none of these.

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Which of the following statements is(are) false? I.Risk-averse investors reject investments that are fair games. II.Risk-neutral investors judge risky investments only by the expected returns. III.Risk-averse investors judge investments only by their riskiness. IV.Risk-loving investors will not engage in fair games.


A) I only
B) II only
C) I and II only
D) II and III only
E) III,and IV only

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An investor invests 60 percent of his wealth in a risky asset with an expected rate of return of 0.14 and a variance of 0.32 and 40 percent in a T-bill that pays 3 percent.His portfolio's expected return and standard deviation are __________ and __________,respectively.


A) 0.096;0.339
B) 0.087;0.267
C) 0.295;0.123
D) 0.087;0.182
E) none of these

Correct Answer

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Which of the following sayings illustrates the concept of diversification?


A) Don't throw the baby out with the bathwater.
B) A stitch in time saves nine.
C) Neither a borrower nor a lender be.
D) Don't put all your eggs in one basket.
E) Out of sight,out of mind.

Correct Answer

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Which of the following statements regarding risk-averse investors is true?


A) They only care about the rate of return.
B) They accept investments that are fair games.
C) They only accept risky investments that offer risk premiums over the risk-free rate.
D) They are willing to accept lower returns and high risk.
E) a and b.

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Asset allocation


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

Correct Answer

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


A) will decrease as the rate of return increases.
B) will decrease as the standard deviation increases.
C) will decrease as the variance increases.
D) will increase as the variance increases.
E) will increase as the rate of return increases.

Correct Answer

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