T2 ASSET ALLOCATION

Which of the following uses derivatives?

I To fully or partially hedge the price risk of existing portfolio;

II. To create synthetic positions and by the use of margin leverage,

secure the remaining fund in cash to earn interest;

III. To arbitrage between futures and equity if any short term mispricing arises

IV. To short the market.

• A. I, II, III

• B. II, III, IV

• C. I, II, IV,

• D. I, III, IV, V

• E. All of the above

Based on the estimation risk aversion, all the following below are correct EXCEPT

• A. Use questionnaires

• B. Observe how much people are willing to pay to avoid risk

• C. Does not use questionnaires

• D. Observe individuals decisions when confronted with risk

• E. None of the above

In the mean-standard deviation graph, the indifference curve has a ________ slope.

• A. negative

• B. zero

• C. positive

• D. northeast

• E. cannot be determined

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

Based on the asset allocation, which of the following is true?

• 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.

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

An investor invests 40% of his wealth in a risky asset with an expected rate of return of 0.17 and a variance of 0.08 and 60%in a T-bill that pays 4.5%. 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

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 lover investors will not engage in fair games. 

• A. I only

• B. II only

• C. I and II only

• D. II and III only

• E. III, and IV only

John is a risk-averse investor. Davis is a less risk-averse investor than John. Therefore, 

• A. for the same risk, David requires a higher rate of return than John.

• B. for the same return, John tolerates a higher risk than David.

• C. for the same risk, John requires a lower rate of return than David.

• D. for the same return, David tolerates higher risk than John.

• E. cannot be determined.

Assume an investor with the following utility function: U = E(r) − 3/2(s2). To maximize her expected utility, she would choose the asset with an expected rate of return of _______ and a standard deviation of ________, respectively.

• A. 12%; 20%

• B. 10%; 15%

• C. 10%; 10%

• D. 8%; 10%

• E. 10%; 12%