Equity markets 6 - D) identifying market anomalies. E) none...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset 15. The change from a straight to a kinked capital allocation line is a result of: A) reward-to-volatility ratio increasing. B) borrowing rate exceeding lending rate. C) an investor's risk tolerance decreasing. D) increase in the portfolio proportion of the risk-free asset. E) none of the above. Answer: B Difficulty: Difficult Rationale: The linear capital allocation line assumes that the investor may borrow and lend at the same rate (the risk-free rate), which obviously is not true. Relaxing this assumption and incorporating the higher borrowing rates into the model results in the kinked capital allocation line. 16. The first major step in asset allocation is: A) assessing risk tolerance. B) analyzing financial statements. C) estimating security betas.
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Unformatted text preview: D) identifying market anomalies. E) none of the above. Answer: A Difficulty: Moderate Rationale: A should be the first consideration in asset allocation. B, C, and D refer to security selection. 17. Based on their relative degrees of risk tolerance A) investors will hold varying amounts of the risky asset in their portfolios. B) all investors will have the same portfolio asset allocations. C) investors will hold varying amounts of the risk-free asset in their portfolios. D) A and C. E) none of the above. Answer: D Difficulty: Easy Rationale: By determining levels of risk tolerance, investors can select the optimum portfolio for their own needs; these asset allocations will vary between amounts of risk-free and risky assets based on risk tolerance. 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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