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40. One method of forecasting the risk premium is to use the _______.
41. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of
A
= 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky
portfolio's expected return is at least ______.
42. In the mean standard deviation graph, the line that connects the risk-free rate and the
optimal risky portfolio,
P
, is called the _________.
43. Most studies indicate that investors' risk aversion is in the range _____.
44. Two assets have the following expected returns and standard deviations when the risk-
free rate is 5%:
An investor with a risk aversion of
A
= 3 would find that _________________ on a risk-return basis.
45. Historically, the best asset for the long-term investor wanting to fend off the threats of
inflation and taxes while making his money grow has been ____.
46. The formula is used to calculate the _____________.
47. A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills
were paying 4.5%. This portfolio had a Sharpe ratio of ____.
48. Consider a Treasury bill with a rate of return of 5% and the following risky securities:
Security A:
E
(
r
) = .15; variance = .0400
Security B:
E
(
r
) = .10; variance = .0225
Security C:
E
(
r
) = .12; variance = .1000
Security D:
E
(
r
) = .13; variance = .0625
The investor must develop a complete portfolio by combining the risk-free asset with one of the
securities mentioned above. The security the investor should choose as part of her complete
portfolio to achieve the best CAL would be _________.
49. You purchased a share of stock for $29. One year later you received $2.25 as dividend and
sold the share for $28. Your holding-period return was _________.
50. Security A has a higher standard deviation of returns than security B. We would expect
that:
I. Security A would have a higher risk premium than security B.
II. The likely range of returns for security A in any given year would be higher than the likely range
of returns for security B.
III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.
51. The holding-period return on a stock was 25%. Its ending price was $18, and its beginning
price was $16. Its cash dividend must have been _________.
52. An investor invests 70% of her wealth in a risky asset with an expected rate of return of
15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's
expected rate of return and standard deviation are __________ and __________ respectively.
53. The holding-period return on a stock was 32%. Its beginning price was $25, and its cash
dividend was $1.50. Its ending price must have been _________.
54. Consider the following two investment alternatives: First, a risky portfolio that pays a 15%
rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a
Treasury bill that pays 6%. The risk premium on the risky investment is _________.
55. Consider the following two investment alternatives: First, a risky portfolio that pays a 20%
rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a
Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would
be _________.
56. You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill
with a rate of return of 5%. How much money should be invested in the risky asset to form a
portfolio with an expected return of 11%?
57. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill
with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky
portfolio if you want your complete portfolio to have a standard deviation of 9%.
58. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill
with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be
formed if you _________.
59. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill
with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and
the risk-free asset is approximately _________.
60. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is
8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should
_________.
61. The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's
borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the
standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio
is _________.
