Equity markets 2 - asset respectively to form a portfolio...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset 4.An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively. A) 0.114; 0.12 B) 0.087;0.06 C) 0.295; 0.12 D) 0.087; 0.12 E) none of the above Answer: B Difficulty: Moderate Rationale: E(r P ) = 0.3(15%) + 0.7(6%) = 8.7%; s P = 0.3(0.04)1/2 = 6%. Use the following to answer questions 5-8: You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. 5. What percentages of your money must be invested in the risky asset and the risk-free
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Unformatted text preview: asset, respectively, to form a portfolio with an expected return of 0.09? A) 85% and 15% B) 75% and 25% C) 67% and 33% D) 57% and 43% E) cannot be determined Answer: D Difficulty: Moderate Rationale: 9% = w 1 (12%) + (1 - w 1 )(5%); 9% = 12%w 1 + 5% - 5%w 1 ; 4% = 7%w 1 ; w 1 = 0.57; 1 - w 1 = 0.43; 0.57(12%) + 0.43(5%) = 8.99% . 6. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.06? A) 30% and 70% B) 50% and 50% C) 60% and 40% D) 40% and 60% E) cannot be determined Answer: C Difficulty: Moderate Rationale: 0.06 = x(0.15); x = 40% in risky asset. 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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