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WorksheetsT2 ASSET ALLOCATION
Total questions: 25
Worksheet time: 58mins
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%
A reward-to-volatility ratio is useful in:
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 these is correct.
Based on the utility equation, the higher the value of index A,
A. the less risk averse investors, the investor is risk lover.
B. the more risk averse investors, the investor penalized risky investments more severely.
C. the more aggressive the investor is in terms of returns.
D. the more the investor is prone to gambling.
E. A, B, C and D are all incorrect.
The certainty equivalent rate (CER) of a portfolio is
A. the rate that a risk-free investment would need to offer with certainty to be considered equally attractive as the risky portfolio.
B. the rate that the investor must earn for certain to give up the use of his money.
C. the minimum rate guaranteed by institutions such as banks.
D. the rate that equates "A" in the utility function with the average risk aversion coefficient for all risk-averse investors.
E. represented by the scaling factor "−.005" in the utility function.
In a multi-factor APT model, the coefficients on the macro factors are often called as ________.
A. systemic risk
B. firm-specific risk
C. idiosyncratic risk
D. factor loadings
E. unique risk
The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called ___________.
A. arbitrage
B. capital asset pricing
C. factoring
D. fundamental analysis
E. technical analysis
The following factors might affect stock returns:
A. the business cycle.
B. interest rate fluctuations.
C. inflation rates.
D. the business cycle, interest rate fluctuations, and inflation rates.
E. the relationship between past FRED spreads.
Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on factor 1 and factor 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 15.0%
C. 16.5%
D. 23.0%
E. 18.7%
Risk premium defined as ______
I. The excess return from the riskfree rate return.
II. A multiple of the Portfolio’s Beta with Market Risk Premium.
III. Larger when the average rate of return is lower.
IV. Larger when the volatility of returns is higher.
V. Larger when the riskfree rate of return is higher
A. I, II, III
B. II, III, IV
C. I, II, IV
D. I, III, IV, V
E. All of the above
The APT differs from the CAPM because the APT _________.
A. places more emphasis on market risk
B. minimizes the importance of diversification
C. recognizes multiple unsystematic risk factors
D. recognizes multiple systematic risk factors
E. places more emphasis on systematic risk
Consider the one-factor APT. The variance of returns on the factor portfolio is 11%. The beta of a well-diversified portfolio on the factor is 1.45. The variance of returns on the well-diversified portfolio is approximately __________.
A. 23.1%
B. 6.0%
C. 7.3%
D. 14.1%
E. 11.4%
Discuss the differences between investors who are risk averse, risk-neutral, and risk lover.
In the utility function: U = E(r) − [−0.005As2], what is the significance of "A"?
A portfolio has an expected rate of return of 20% and a standard deviation of 30%. T-bills offer a safe rate of return of 7%. Would an investor with risk-aversion parameter A = 4 prefer to invest in T-bills or the risky portfolio? What if A = 2?
Based on your understanding, explain Sharpe Ratio (Slope in CAL)
Explain what is a risk averse investor and what investment portfolio they are willing to consider?
