Question 1

Which of the following statements regarding the capital allocation line (CAL) is false?

Accepted Answer

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. 
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.

Question 2

The riskiness of individual assets

Accepted Answer

A)  should be considered for the asset in isolation. 
B)  should be considered in the context of the effect on overall portfolio volatility. 
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 and should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio. 
A)  should be considered for the asset in isolation. 
B)  should be considered in the context of the effect on overall portfolio volatility. 
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 and should be combined with the riskiness of other individual assets in the proportions these assets constitute the entire portfolio.

Question 3

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 is the equation of Bo's capital allocation line?

Accepted Answer

A)  E(r
C)  = 7.2 + 3.6 × Standard Deviation of P 
B)  E(r
C)  = 3.6 + 1.167 × Standard Deviation of P 
C)  E(r
C)  = 3.6 + 12.0 × Standard Deviation of P 
D)  E(r
C)  = 0.2 + 1.167 × Standard Deviation of P 
E)  E(r
C)  = 3.6 + 0.857 × Standard Deviation of P 
A)  E(r
C)  = 7.2 + 3.6 × Standard Deviation of P 
B)  E(r
C)  = 3.6 + 1.167 × Standard Deviation of P 
C)  E(r
C)  = 3.6 + 12.0 × Standard Deviation of P 
D)  E(r
C)  = 0.2 + 1.167 × Standard Deviation of P 
E)  E(r
C)  = 3.6 + 0.857 × Standard Deviation of P

Question 4

The expected return of a two asset portfolio with a correlation coefficient of .35 will be _______________ the weighted average expected return of the portfolio.

Accepted Answer

A)  below 
B)  above 
C)  equal to 
D)  None of the options are correct 
A)  below 
B)  above 
C)  equal to 
D)  None of the options are correct

Question 5

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 is the standard deviation of Bo's complete portfolio?

Accepted Answer

A)  7.20% 
B)  5.40% 
C)  6.92% 
D)  4.98% 
E)  5.76% 
A)  7.20% 
B)  5.40% 
C)  6.92% 
D)  4.98% 
E)  5.76%

Question 6

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

Accepted Answer

A)  0.47. 
B)  0.80. 
C)  2.14. 
D)  0.40. 
E)  Cannot be determined. 
A)  0.47. 
B)  0.80. 
C)  2.14. 
D)  0.40. 
E)  Cannot be determined.

Question 7

To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then

Accepted Answer

A)  find the utility of a portfolio with 0% in the risk-free asset. 
B)  change the expected return of the portfolio and equate the utility to the standard deviation. 
C)  find another utility level with 0% risk. 
D)  change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level. 
E)  change the risk-free rate and find the utility level that results in the same standard deviation. 
A)  find the utility of a portfolio with 0% in the risk-free asset. 
B)  change the expected return of the portfolio and equate the utility to the standard deviation. 
C)  find another utility level with 0% risk. 
D)  change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level. 
E)  change the risk-free rate and find the utility level that results in the same standard deviation.

Question 8

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. A portfolio that has an expected outcome of $115 is formed by

Accepted Answer

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. 
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.

Question 9

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?

Accepted Answer

A)  30.1% 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. 
A)  30.1% 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.

Question 10

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 risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.20?

Accepted Answer

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

Question 11

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

Accepted Answer

A)  0.325. 
B)  0.675. 
C)  0.912. 
D)  0.407. 
E)  Cannot be determined. 
A)  0.325. 
B)  0.675. 
C)  0.912. 
D)  0.407. 
E)  Cannot be determined.

Question 12

The reduction in standard deviation from a well diversified portfolio of 100 stocks will ______________ than that of a 200 stock portfolio.

Accepted Answer

A)  not be statistically significantly different 
B)  be statistically significantly different 
C)  equal to 
D)  None of the options are correct 
A)  not be statistically significantly different 
B)  be statistically significantly different 
C)  equal to 
D)  None of the options are correct

Question 13

According to the mean-variance criterion, which of the statements below is correct? $\begin{array}{lcc}
\text { Investment } & E(r) & \text { Standard Deviation } \
\text { A } & 10 \% & 5 \% \
\text { B } & 21\% & 11 \% \
\text { C } & 18 \% & 23 \% \
\text { D } & 24\% & 16 \%
\end{array}$

Accepted Answer

A)  Investment B dominates investment A. 
B)  Investment B dominates investment C. 
C)  Investment D dominates all of the other investments. 
D)  Investment D dominates only investment B. 
E)  Investment C dominates investment A. 
A)  Investment B dominates investment A. 
B)  Investment B dominates investment C. 
C)  Investment D dominates all of the other investments. 
D)  Investment D dominates only investment B. 
E)  Investment C dominates investment A.

Question 14

A fair game

Accepted Answer

A)  will not be undertaken by a risk-averse investor. 
B)  is a risky investment with a zero risk premium. 
C)  is a riskless investment. 
D)  will not be undertaken by a risk-averse investor and is a risky investment with a zero risk premium. 
E)  will not be undertaken by a risk-averse investor and is a riskless investment. 
A)  will not be undertaken by a risk-averse investor. 
B)  is a risky investment with a zero risk premium. 
C)  is a riskless investment. 
D)  will not be undertaken by a risk-averse investor and is a risky investment with a zero risk premium. 
E)  will not be undertaken by a risk-averse investor and is a riskless investment.

Question 15

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?

Accepted Answer

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

Question 16

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 is the expected return on Bo's complete portfolio?

Accepted Answer

A)  10.32% 
B)  5.28% 
C)  9.62% 
D)  8.44% 
E)  7.58% 
A)  10.32% 
B)  5.28% 
C)  9.62% 
D)  8.44% 
E)  7.58%

Question 17

Based on their relative degrees of risk tolerance,

Accepted Answer

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)  investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios. 
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)  investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios.

Question 18

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 0.10, what percentages of your money must you invest in the T-bill, X, and Y, respectively, if you keep X and Y in the same proportions to each other as in portfolio P?

Accepted Answer

A)  0.25; 0.45; 0.30 
B)  0.19; 0.49; 0.32 
C)  0.32; 0.41; 0.27 
D)  0.50; 0.30; 0.20 
E)  Cannot be determined. 
A)  0.25; 0.45; 0.30 
B)  0.19; 0.49; 0.32 
C)  0.32; 0.41; 0.27 
D)  0.50; 0.30; 0.20 
E)  Cannot be determined.

Question 19

Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,

Accepted Answer

A)  for the same risk, David requires a higher rate of return than Elias. 
B)  for the same return, Elias tolerates higher risk than David. 
C)  for the same risk, Elias requires a lower rate of return than David. 
D)  for the same return, David tolerates higher risk than Elias. 
E)  Cannot be determined. 
A)  for the same risk, David requires a higher rate of return than Elias. 
B)  for the same return, Elias tolerates higher risk than David. 
C)  for the same risk, Elias requires a lower rate of return than David. 
D)  for the same return, David tolerates higher risk than Elias. 
E)  Cannot be determined.

Question 20

The first major step in asset allocation is

Accepted Answer

A)  assessing risk tolerance. 
B)  analyzing financial statements. 
C)  estimating security betas. 
D)  identifying market anomalies. 
A)  assessing risk tolerance. 
B)  analyzing financial statements. 
C)  estimating security betas. 
D)  identifying market anomalies.

Exam 6: Capital Allocation to Risky Assets

Which of the following statements regarding the capital allocation line (CAL) is false?

The riskiness of individual assets

The expected return of a two asset portfolio with a correlation coefficient of .35 will be _______________ the weighted average expected return of the portfolio.

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

To build an indifference curve, we can first find the utility of a portfolio with 100% in the risk-free asset, then

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. A portfolio that has an expected outcome of $115 is formed by

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

The reduction in standard deviation from a well diversified portfolio of 100 stocks will ______________ than that of a 200 stock portfolio.

According to the mean-variance criterion, which of the statements below is correct? Investment E(r) Standard Deviation A 10\% 5\% B 21\% 11\% C 18\% 23\% D 24\% 16\%

A fair game

Based on their relative degrees of risk tolerance,

Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,

The first major step in asset allocation is

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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