Equity markets 3 - 9. Consider a T-bill with a rate of...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset 7.A portfolio that has an expected outcome of $115 is formed by A) investing $100 in the risky asset. B) investing $80 in the risky asset and $20 in the risk-free asset. C) borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky asset. D) investing $43 in the risky asset and $57 in the riskless asset. E) Such a portfolio cannot be formed. Answer: C Difficulty: Difficult Rationale: For $100, (115-100)/100=15%; .15 = w 1 (.12) + (1 - w 1 )(.05); .15 = .12w 1 + .05 - .05w 1 ; 0.10 = 0.07w 1 ; w 1 = 1.43($100) = $143; (1 - w 1 )$100 = -$43. 8. The slope of the Capital Allocation Line formed with the risky asset and the risk-free asset is equal to A) 0.4667. B) 0.8000. C) 2.14. D) 0.41667. E) Cannot be determined. Answer: A Difficulty: Moderate Rationale: (0.12 - 0.05)/0.15 = 0.4667.
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Unformatted text preview: 9. Consider a T-bill with a rate of return of 5 percent and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04 Security B: E(r) = 0.10; Variance = 0.0225 Security C: E(r) = 0.12; Variance = 0.01 Security D: E(r) = 0.13; Variance = 0.0625 From which set of portfolios, formed with the T-bill and any one of the 4 risky securities, would a risk-averse investor always choose his portfolio? A) The set of portfolios formed with the T-bill and security A. B) The set of portfolios formed with the T-bill and security B. C) The set of portfolios formed with the T-bill and security C. D) The set of portfolios formed with the T-bill and security D. E) Cannot be determined. Answer: C Difficulty: Difficult Rationale: Security C has the highest reward-to-volatility ratio. 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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