Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
26. Which of the following statements regarding the Capital Allocation Line (CAL) is false? A. The CAL shows risk-return combinations.
B. The slope of the CAL equals the increase in the expected return of the complete portfolio per unit of additional standard deviation.
C. The slope of the CAL is also called the reward-to-volatility ratio.
D. The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset. E. The CAL shows risk-return combinations and is also called the efficient frontier of risky assets in the absence of a risk-free asset.
The CAL consists of combinations of a risky asset and a risk-free asset whose slope is the reward-to-volatility ratio
AACSB: Analytic Bloom's: Understand Difficulty: Intermediate
Topic: Portfolio Risk Allocation
27. Given the capital allocation line, an investor's optimal portfolio is the portfolio that A. maximizes her expected profit. B. maximizes her risk.
C. minimizes both her risk and return. D. maximizes her expected utility. E. minimizes her risk.
By maximizing expected utility, the investor is obtaining the best risk-return relationships possible and acceptable for her.
AACSB: Analytic Bloom's: Remember Difficulty: Intermediate
Topic: Portfolio Risk Allocation
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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
28. An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively. A. 0.114; 0.12 B. 0.087; 0.06 C. 0.295; 0.12 D. 0.087; 0.12 E. 0.795; 0.14
E(rP) = 0.3(15%) + 0.7(6%) = 8.7%; sP = 0.3(0.04)1/2 = 6%.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate
Topic: Portfolio Risk Allocation
29. An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.13 and a variance of 0.03 and 70 percent in a T-bill that pays 6 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively. A. 0.114; 0.128 B. 0.087; 0.063 C. 0.295; 0.125 D. 0.081; 0.052 E. 0.795; 0.14
E(rP) = 0.3(13%) + 0.7(6%) = 8.1%; sP = 0.3(0.03)1/2 = 5.19%.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate
Topic: Portfolio Risk Allocation
6-37
Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
30. An investor invests 40 percent of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60 percent in a T-bill that pays 4.5 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively. A. 0.114; 0.126 B. 0.087; 0.068 C. 0.095; 0.113 D. 0.087; 0.124 E. 0.795; 0.14
E(rP) = 0.4(17%) + 0.6(4.5%) = 9.5%; sP = 0.4(0.08)1/2 = 11.31%.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate
Topic: Portfolio Risk Allocation
31. An investor invests 70 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 30 percent in a T-bill that pays 5 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively. A. 0.120; 0.14 B. 0.087; 0.06 C. 0.295; 0.12 D. 0.087; 0.12 E. 0.895; 0.11
E(rP) = 0.7(15%) + 0.3(5%) = 12.0%; sP = 0.7(0.04)1/2 = 14%.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate
Topic: Portfolio Risk Allocation
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.
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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
32. 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
9% = w1(12%) + (1 ? w1)(5%); 9% = 12%w1 + 5% ? 5%w1; 4% = 7%w1; w1 = 0.57; 1 ? w1 = 0.43; 0.57(12%) + 0.43(5%) = 8.99%.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate
Topic: Portfolio Risk Allocation
33. 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
0.06 = x(0.15); x = 40% in risky asset.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate
Topic: Portfolio Risk Allocation
6-39
Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets
34. A portfolio that has an expected outcome of $115 is formed by A. Investing $100 in the risky asset.
B. Investing $80 in the risky asset and $20 in the risk-free asset.
C. Borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky asset. D. Investing $43 in the risky asset and $57 in the riskless asset. E. such a portfolio cannot be formed.
For $100, (115 ? 100)/100 = 15%; .15 = w1(.12) + (1 ? w1)(.05); .15 = .12w1 + .05 ? .05w1; 0.10 = 0.07w1; w1 = 1.43($100) = $143; (1 ? w1)$100 = ?$43.
AACSB: Analytic Bloom's: Apply
Difficulty: Challenge
Topic: Portfolio Risk Allocation
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. (0.12 ? 0.05)/0.15 = 0.4667.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate
Topic: Portfolio Risk Allocation
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