CHAPTER 13: Risky Assets
MULTIPLE CHOICE
1. Suppose that Ms. Lynch in Problem 1 can make up her portfolio using a risk-free asset that offers a
surefire rate of return of 10% and a risky asset with an expected rate of return of 20%, with standard
deviation 5. If she chooses a portfolio with an expected rate of return of 20%, then the standard
deviation of her return on this portfolio will be
a.
2.50%.
b.
8%.
c.
5%.
d.
10%.
e.
None of the above.
2. Suppose that Ms. Lynch in Problem 1 can make up her portfolio using a risk-free asset that offers a
surefire rate of return of 15% and a risky asset with an expected rate of return of 25%, with standard
deviation 5. If she chooses a portfolio with an expected rate of return of 20%, then the standard
deviation of her return on this portfolio will be
a.
2.50%.
b.
5%.
c.
5.50%.
d.
1.25%.
e.
None of the above.
3. Suppose that Ms. Lynch in Problem 1 can make up her portfolio using a risk-free asset that offers a
surefire rate of return of 10% and a risky asset with an expected rate of return of 20%, with standard
deviation 5. If she chooses a portfolio with an expected rate of return of 17.50%, then the standard
deviation of her return on this portfolio will be
a.
3.75%.
b.
7.50%.
c.
6.75%.
d.
1.88%.
e.
None of the above.
4. Suppose that Ms. Lynch in Problem 1 can make up her portfolio using a risk-free asset that offers a
surefire rate of return of 10% and a risky asset with an expected rate of return of 15%, with standard
deviation 5. If she chooses a portfolio with an expected rate of return of 15%, then the standard
deviation of her return on this portfolio will be
a.
2.50%.
b.
8%.
c.
5%.
d.
10%.
e.
None of the above.
5. Suppose that Ms. Lynch in Problem 1 can make up her portfolio using a risk-free asset that offers a
surefire rate of return of 5% and a risky asset with an expected rate of return of 10%, with standard
deviation 5. If she chooses a portfolio with an expected rate of return of 8.75%, then the standard
deviation of her return on this portfolio will be
a.
7.50%.
b.
3.75%.
c.
1.88%.
d.
6.75%.
e.
None of the above.
6. Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which
gives him an expected rate of return of 15% with zero standard deviation and one of which gives him
an expected rate of return of 25% and has a standard deviation of 10. He can alter the expected rate of
return and the variance of his portfolio by changing the proportions in which he holds the two assets. If
we draw a “budget line” with expected return on the vertical axis and standard deviation on the
horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
a.
1.
b.
−1.
c.
0.50.
d.
−0.50.
e.
1.50.
7. Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which
gives him an expected rate of return of 15% with zero standard deviation and one of which gives him
an expected rate of return of 75% and has a standard deviation of 15. He can alter the expected rate of
return and the variance of his portfolio by changing the proportions in which he holds the two assets. If
we draw a “budget line” with expected return on the vertical axis and standard deviation on the
horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
a.
4.
b.
−2.
c.
2.
d.
−4.
e.
6.
8. Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which
gives him an expected rate of return of 15% with zero standard deviation and one of which gives him
an expected rate of return of 30% and has a standard deviation of 15. He can alter the expected rate of
return and the variance of his portfolio by changing the proportions in which he holds the two assets. If
we draw a “budget line” with expected return on the vertical axis and standard deviation on the
horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
a.
0.50.
b.
−1.
c.
−0.50.
d.
1.
e.
1.50.
9. Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which
gives him an expected rate of return of 15% with zero standard deviation and one of which gives him
an expected rate of return of 45% and has a standard deviation of 15. He can alter the expected rate of
return and the variance of his portfolio by changing the proportions in which he holds the two assets. If
we draw a “budget line” with expected return on the vertical axis and standard deviation on the
horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
a.
2.
b.
1.
c.
−1.
d.
−2.
e.
3.
10. Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which
gives him an expected rate of return of 15% with zero standard deviation and one of which gives him
an expected rate of return of 45% and has a standard deviation of 10. He can alter the expected rate of
return and the variance of his portfolio by changing the proportions in which he holds the two assets. If
we draw a “budget line” with expected return on the vertical axis and standard deviation on the
horizontal axis, depicting the combination that Smith can obtain, the slope of this budget line is
a.
1.50.
b.
−1.50.
c.
−3.
d.
3.
e.
4.50.