investment chapter6

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

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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

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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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