Question 1

The presence of risk means that

Accepted Answer

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. 
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.

Question 2

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) − (A/2)s2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

Accepted Answer

A)  5 
B)  6 
C)  7 
D)  8 
A)  5 
B)  6 
C)  7 
D)  8

Question 3

A reward-to-volatility ratio is useful in

Accepted Answer

A)  measuring the standard deviation of returns. 
B)  understanding how returns increase relative to risk increases. 
C)  analyzing returns on variable-rate bonds. 
D)  assessing the effects of inflation. 
E)  None of the options are correct. 
A)  measuring the standard deviation of returns. 
B)  understanding how returns increase relative to risk increases. 
C)  analyzing returns on variable-rate bonds. 
D)  assessing the effects of inflation. 
E)  None of the options are correct.

Question 4

According to the mean-variance criterion, which one of the following investments dominates all others?

Accepted Answer

A)  E(r) = 0.15; Variance = 0.20 
B)  E(r) = 0.10; Variance = 0.20 
C)  E(r) = 0.10; Variance = 0.25 
D)  E(r) = 0.15; Variance = 0.25 
E)  None of these options dominates the other alternatives. 
A)  E(r) = 0.15; Variance = 0.20 
B)  E(r) = 0.10; Variance = 0.20 
C)  E(r) = 0.10; Variance = 0.25 
D)  E(r) = 0.15; Variance = 0.25 
E)  None of these options dominates the other alternatives.

Question 5

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.
Based on the utility function above, which investment would you select?

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
E)  Cannot be determined from the information given. 
A)  1 
B)  2 
C)  3 
D)  4 
E)  Cannot be determined from the information given.

Question 6

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A)  0.089; 0.111 
B)  0.087; 0.063 
C)  0.096; 0.126 
D)  0.087; 0.144 
A)  0.089; 0.111 
B)  0.087; 0.063 
C)  0.096; 0.126 
D)  0.087; 0.144

Question 7

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.

Accepted Answer

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

Question 8

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A)  0.086; 0.242 
B)  0.054; 0.104 
C)  0.295; 0.123 
D)  0.087; 0.182 
E)  None of the options are correct. 
A)  0.086; 0.242 
B)  0.054; 0.104 
C)  0.295; 0.123 
D)  0.087; 0.182 
E)  None of the options are correct.

Question 9

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

Accepted Answer

A)  0.114; 0.12 
B)  0.096; 0.08 
C)  0.295; 0.06 
D)  0.087; 0.12 
E)  None of the options are correct. 
A)  0.114; 0.12 
B)  0.096; 0.08 
C)  0.295; 0.06 
D)  0.087; 0.12 
E)  None of the options are correct.

The presence of risk means that

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) − (A/2)s². Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

A reward-to-volatility ratio is useful in

According to the mean-variance criterion, which one of the following investments dominates all others?

Use the below information to answer the following question. Investment Expected Return E(r) Standard Deviation 1 0.12 0.13 2 0.15 0.15 3 0.21 0.16 4 0.24 0.21 U = E(r)? (A/2)s², where A = 4.0. Based on the utility function above, which investment would you select?

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected return and standard deviation are and , respectively.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%. His portfolio's expected return and standard deviation are and , respectively.

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation are and , respectively.

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

Filters

Exam 6: Capital Allocation to Risky Assets

The presence of risk means that

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) − (A/2)s2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

A reward-to-volatility ratio is useful in

According to the mean-variance criterion, which one of the following investments dominates all others?

Use the below information to answer the following question. Investment Expected Return E(r) Standard Deviation 1 0.12 0.13 2 0.15 0.15 3 0.21 0.16 4 0.24 0.21 U = E(r)? (A/2)s2, where A = 4.0. Based on the utility function above, which investment would you select?

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation are __________ and __________, respectively.

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

Filters

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) − (A/2)s². Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

Use the below information to answer the following question. Investment Expected Return E(r) Standard Deviation 1 0.12 0.13 2 0.15 0.15 3 0.21 0.16 4 0.24 0.21 U = E(r)? (A/2)s², where A = 4.0. Based on the utility function above, which investment would you select?

An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected return and standard deviation are and , respectively.

An investor invests 30% of his wealth in a risky asset with an expected rate of return of 0.11 and a variance of 0.12 and 70% in a T-bill that pays 3%. His portfolio's expected return and standard deviation are and , respectively.

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His portfolio's expected return and standard deviation are and , respectively.