investment chapter6

Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

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

E. investors would perform vastly different levels of security analysis.

By determining levels of risk tolerance, investors can select the optimum portfolio for their own needs; these asset allocations will vary between amounts of risk-free and risky assets based on risk tolerance.

AACSB: Analytic Bloom's: Remember Difficulty: Basic

Topic: Risk Tolerance

45. Asset allocation

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

D. may involve the decision as to the allocation between a risk-free asset and a risky asset and may involve the decision as to the allocation among different risky assets.

E. may involve the decision as to the allocation between a risk-free asset and a risky asset and may involve considerable security analysis.

Asset allocation may involve the decision as to the allocation between a risk-free asset and a risky asset and also involve the decision as to the allocation among different risky assets.

AACSB: Analytic Bloom's: Understand Difficulty: Basic

Topic: Portfolio Risk Allocation

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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

46. 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. skewness

The Capital Allocation Line (CAL) illustrates the possible combinations of a risk-free asset and a risky asset available to the investor.

AACSB: Analytic Bloom's: Remember Difficulty: Intermediate

Topic: Portfolio Risk Allocation

47. 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 their short-term nature makes their values insensitive to interest rate fluctuations and the inflation uncertainty over their time to maturity is negligible.

E. both the inflation uncertainty over their time to maturity is negligible and their term to maturity is identical to most investors' desired holding periods.

Treasury bills do not exactly match most investors' desired holding periods, but because they mature in only a few weeks or months they are relatively free of interest rate sensitivity and inflation uncertainty.

AACSB: Analytic Bloom's: Remember Difficulty: Basic

Topic: Portfolio Risk Allocation

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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

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.

48. What is the expected return on Bo's complete portfolio? A. 10.32% B. 5.28% C. 9.62% D. 8.44% E. 7.58%

E(rC) = .8 * 12.00% + .2 * 3.6% = 10.32%

AACSB: Analytic Bloom's: Apply Difficulty: Basic

Topic: Portfolio Risk Allocation

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Chapter 06 - Risk Aversion and Capital Allocation to Risky Assets

49. What is the standard deviation of Bo's complete portfolio? A. 7.20% B. 5.40% C. 6.92% D. 4.98% E. 5.76%

Std. Dev. of C = .8 * 7.20% = 5.76%

AACSB: Analytic Bloom's: Apply Difficulty: Basic

Topic: Portfolio Risk Allocation

50. What is the equation of Bo's Capital Allocation Line? A. E(rC) = 7.2 + 3.6 * Standard Deviation of C B. E(rC) = 3.6 + 1.167 * Standard Deviation of C C. E(rC) = 3.6 + 12.0 * Standard Deviation of C D. E(rC) = 0.2 + 1.167 * Standard Deviation of C E. E(rC) = 3.6 + 0.857 * Standard Deviation of C

The intercept is the risk-free rate (3.60%) and the slope is (12.00% ? 3.60%)/7.20% = 1.167.

AACSB: Analytic Bloom's: Apply

Difficulty: Intermediate

Topic: Portfolio Risk Allocation

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