Equity markets 11 - The authors describe how to trace out...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset 29.To build an indifference curve we can first find the utility of a portfolio with 100% in the risk-free asset, then A) find the utility of a portfolio with 0% in the risk-free asset. B) change the expected return of the portfolio and equate the utility to the standard deviation. C) find another utility level with 0% risk. D) change the standard deviation of the portfolio and find the expected return the investor would require to maintain the same utility level. E) change the risk-free rate and find the utility level that results in the same standard deviation. Answer: D Difficulty: Difficult Rationale: This references the procedure described on page 207-208 of the text.
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Unformatted text preview: The authors describe how to trace out indifference curves using a spreadsheet. 30. The Capital Market Line I) is a special case of the Capital Allocation Line. II) represents the opportunity set of a passive investment strategy. III) has the one-month T-Bill rate as its intercept. IV) uses a broad index of common stocks as its risky portfolio. A) I, III, and IV B) II, III, and IV C) III and IV D) I, II, and III E) I, II, III, and IV Answer: E Difficulty: Moderate Rationale: 'The Capital Market Line is the Capital Allocation Line based on the one-month T-Bill rate and a broad index of common stocks. It applies to an investor pursuing a passive management strategy. Bodie, Investments, Sixth Edition...
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