Equity markets 5 - Rationale($1,200 $1,000/$1,000 =...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset 12. What would be the dollar values of your positions in X and Y, respectively, if you decide to hold 40% percent of your money in the risky portfolio and 60% in T-bills? A) $240; $360 B) $360; $240 C) $100; $240 D) $240; $160 E) Cannot be determined Answer: D Difficulty: Moderate Rationale: $400(0.6) = $240 in X; $400(0.4) = $160 in Y. 13. What would be the dollar value of your positions in X, Y, and the T-bills, respectively, if you decide to hold a portfolio that has an expected outcome of $1,200? A) Cannot be determined B) $54; $568; $378 C) $568; $54; $378 D) $378; $54; $568 E) $108; $514; $378 Answer: B Difficulty: Difficult
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Unformatted text preview: Rationale: ($1,200 - $1,000)/$1,000 = 12%; (0.6)14% + (0.4)10% = 12.4%; 12% = w5% + 12.4%(1 - w);w=.054; 1-w=.946; w = 0.054($1,000) = $54 (T-bills); 1 - w = 1 - 0.054 = 0.946($1,000) = $946; $946 x 0.6 = $568 in X; $946 x 0.4 = $378 in Y. 14. A reward-to-volatility ratio is useful in: A) measuring the standard deviation of returns. B) understanding how returns increase relative to risk increases. C) analyzing returns on variable rate bonds. D) assessing the effects of inflation. E) none of the above. Answer: B Difficulty: Moderate Rationale: B is the only choice relevant to the reward-to-volatility ratio (risk and return). Bodie, Investments, Sixth Edition...
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