Chapter 06 Capital Allocation to Risky Assets Answer Key
Multiple Choice Questions
1.
Which of the following statements regarding risk-averse investors is true?
2.
Which of the following statements is(are) true?
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-loving investors will not engage in fair games.
3.
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-loving investors will not engage in fair games.
4.
In the mean-standard deviation graph an indifference curve has a ________ slope.
5.
In the mean-standard deviation graph, which one of the following statements is true
regarding the indifference curve of a risk-averse investor?
6.
In a return-standard deviation space, which of the following statements is(are) true for
risk-averse investors? (The vertical and horizontal lines are referred to as the expected
return-axis and the standard deviation-axis, respectively.)
I) An investor’s own indifference curves might intersect.
II) Indifference curves have negative slopes.
III) In a set of indifference curves, the highest offers the greatest utility.
IV) Indifference curves of two investors might intersect.
7.
Elias is a risk-averse investor. David is a less risk-averse investor than Elias.
Therefore,
8.
When an investment advisor attempts to determine an investor’s risk tolerance, which
factor would they be least likely to assess?
9.
Assume an investor with the following utility function:
U
=
E
(
r
) – 3/2(
s
2).
To maximize her expected utility, she would choose the asset with an expected rate of
return of _______ and a standard deviation of ________, respectively.
10.
Assume an investor with the following utility function:
U
=
E
(
r
) – 3/2(
s
2).
To maximize her expected utility, which one of the following investment alternatives
would she choose?
11.
A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The
risk-free rate is 6%. An investor has the following utility function:
U
=
E
(
r
) – (
A
/2)
s
2.
Which value of
A
makes this investor indifferent between the risky portfolio and the
risk-free asset?
12.
According to the mean-variance criterion, which one of the following investments
dominates all others?
13.
Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard
deviation of 0.15, that lies on a given indifference curve. Which one of the following
portfolios might lie on the same indifference curve?
14.
U
=
E
(
r
) – (
A
/2)
s
2,where
A
= 4.0.
Based on the utility function above, which investment would you select?
15.
U
=
E
(
r
) – (
A
/2)
s
2,where
A
= 4.0.
Which investment would you select if you were risk neutral?
16.
U
=
E
(
r
) – (
A
/2)
s
2,where
A
= 4.0.
The variable (
A
) in the utility function represents the
17.
The exact indifference curves of different investors
18.
The riskiness of individual assets
19.
A fair game
20.
The presence of risk means that
21.
The utility score an investor assigns to a particular portfolio, other things equal,
22.
The certainty equivalent rate of a portfolio is
23.
According to the mean-variance criterion, which of the statements below is correct?
24.
Steve is more risk-averse than Edie. On a graph that shows Steve and Edie’s
indifference curves, which of the following is true? Assume that the graph shows
expected return on the vertical axis and standard deviation on the horizontal axis.
I) Steve and Edie’s indifference curves might intersect.
II) Steve’s indifference curves will have flatter slopes than Edie’s.
III) Steve’s indifference curves will have steeper slopes than Edie’s.
IV) Steve and Edie’s indifference curves will not intersect.
V) Steve’s indifference curves will be downward sloping and Edie’s will be upward
sloping.
25.
The capital allocation line can be described as the
26.
Which of the following statements regarding the capital allocation line (CAL) is false?
27.
Given the capital allocation line, an investor’s optimal portfolio is the portfolio that
28.
An investor invests 30% of his wealth in a risky asset with an expected rate of return of
0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His portfolio’s expected
return and standard deviation are __________ and __________, respectively.