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Equity markets 13

# Equity markets 13 - B 50 and 50 C 60 and 40 D 40 and 60 E...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset 33.What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.08? A) 85% and 15% B) 75% and 25% C) 62.5% and 37.5% D) 57% and 43% E) cannot be determined Answer: C Difficulty: Moderate Rationale: 8% = w 1 (11%) + (1 - w 1 )(3%); 8% = 11%w 1 + 3% - 3%w 1 ; 5% = 8%w 1 ; w 1 = 0.625; 1 - w 1 = 0.375; 0.625(11%) + 0.375(3%) = 8.0%. 34. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08?
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Unformatted text preview: B) 50% and 50% C) 60% and 40% D) 40% and 60% E) Cannot be determined. Answer: C Difficulty: Moderate Rationale: 0.08 = x(0.20); x = 40% in risky asset. 35. The slope of the Capital Allocation Line formed with the risky asset and the risk-free asset is equal to A) 0.47 B) 0.80 C) 2.14 D) 0.40 E) Cannot be determined. Answer: D Difficulty: Moderate Rationale: (0.11 - 0.03)/0.20 = 0.40. Use the following to answer questions 36-38: You invest \$1000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. Bodie, Investments, Sixth Edition...
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