Equity markets 8 - D) Neither A, B nor C is true. E) A, B...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset 21. Treasury bills are commonly viewed as risk-free assets because A) their short-term nature makes their values insensitive to interest rate fluctuations. B) the inflation uncertainty over their time to maturity is negligible. C) their term to maturity is identical to most investors' desired holding periods. D) Both A and B are true. E) Both B and C are true. Answer: D Difficulty: Easy Rationale: Treasury bills do not exactly match most investor's desired holding periods, but because they mature in only a few weeks or months they are relatively free of interest rate sensitivity and inflation uncertainty. 22. When a portfolio consists of only a risky asset and a riskless asset, increasing the fraction of the overall portfolio invested in the risky asset will A) increase the expected return on the portfolio. B) increase the standard deviation of the portfolio. C) not change the risk-reward ratio.
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Unformatted text preview: D) Neither A, B nor C is true. E) A, B and C are all true. Answer: E Difficulty: Easy Rationale: All three statements correctly describe a portfolio invested in a combination of a risky asset and a riskless asset. 23. In a top-down analysis of portfolio construction A) decisions about which executives will manage the portfolio are made first, then capital allocation decisions are made. B) decisions about asset allocation are made first, then specific securities are chosen. C) decisions about specific securities are made first, then asset allocation decisions are made. D) all securities transactions must be approved by upper-level management. E) an investor's first decision would be about how much to hold in her favorite stock. Answer: B Difficulty: Moderate Rationale: This is the approach most often used by institutional investors. Individual investors typically follow a less-structured approach. Bodie, Investments, Sixth Edition...
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This note was uploaded on 01/31/2010 for the course ECON 3660DE taught by Professor Patrickmartinandvitalialexeev during the Spring '10 term at University of Guelph.

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