Investment and Portfolio Management

Which of the following statements regarding risk-averse investors is true?

• They only care about the rate of return.

• They accept investments that are fair games.

• They only accept risky investments that offer risk premiums over the risk-free rate.

• They are willing to accept lower returns and high risk.

An investor invests 60 percent of his wealth in a risky asset with an expected rate of return of 0.14 and a variance of 0.32 and 40 percent in a T-bill that pays 3 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively.

• 0.096; 0.339

• 0.087; 0.267

• 0.096; 0.123

• 0.087; 0.182

When a portfolio consists of only a risky asset and a risk-free asset, increasing the fraction of the overall portfolio invested in the risky asset will

• increase the expected return on the portfolio.

• increase the standard deviation of the portfolio.

• decrease the standard deviation of the portfolio.

Olivia is a risk-averse investor. Alex is a less risk-averse investor than Olivia. Therefore,

• for the same risk, Alex requires a higher rate of return than Olivia.

• for the same return, Alex tolerates higher risk than Olivia.

• for the same risk, Olivia requires a lower rate of return than Alex.

• for the same return, Olivia tolerates higher risk than Alex.

The standard deviation of a portfolio that has 40% of its value invested in a risk-free asset and 60% of its value invested in a risky asset with a standard deviation of 30% is

• 18%.

• 14%.

• 21%.

• 24%.

Consider the following two investment alternatives. First, a risky portfolio that pays a 20 percent rate of return with a probability of 70% or a 7 percent return with a probability of 30%, and second, a T-bill that pays 3 percent. The risk premium on the risky investment is

• 12.45%.

• 13.1%.

• 9.75%.

• 15.6%.

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

• E(r) = 0.15; Variance = 0.20

• E(r) = 0.10; Variance = 0.20

• E(r) = 0.10; Variance = 0.25

• E(r) = 0.15; Variance = 0.25

The capital allocation line can be described as the

• investment opportunity set formed with a risky asset and a risk-free asset.

• investment opportunity set formed with two risky assets.

• line on which lie all portfolios that offer the same utility to a particular investor.

• line on which lie all portfolios with the same expected rate of return and different standard deviations.

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

• The CAL shows risk-return combinations.

• The slope of the CAL equals the increase in the expected return of the complete portfolio per unit of additional standard deviation.

• The slope of the CAL is also called the reward-to-volatility ratio.

• The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset.

A reward-to-volatility ratio is useful in

• measuring the standard deviation of returns.

• understanding how returns increase relative to risk increases.

• analyzing returns on variable rate bonds.

• assessing the effects of inflation.