Equity markets 1 - per unit of additional standard...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset Multiple Choice Questions 1. The Capital Allocation Line can be described as the A) investment opportunity set formed with a risky asset and a risk-free asset. B) investment opportunity set formed with two risky assets. C) line on which lie all portfolios that offer the same utility to a particular investor. D) line on which lie all portfolios with the same expected rate of return and different standard deviations. E) none of the above. Answer: A Difficulty: Moderate Rationale: The CAL has an intercept equal to the risk-free rate. It is a straight line through the point representing the risk-free asset and the risky portfolio, in expected- return/standard deviation space. 2. Which of the following statements regarding the Capital Allocation Line (CAL) is false ? A) The CAL shows risk-return combinations. B) The slope of the CAL equals the increase in the expected return of a risky portfolio
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Unformatted text preview: per unit of additional standard deviation. C) The slope of the CAL is also called the reward-to-variability ratio. D) The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset. E) Both A and D are true. Answer: D Difficulty: Moderate Rationale: The CAL consists of combinations of a risky asset and a risk-free asset whose slope is the reward-to-variability ratio; thus, all statements except d are true. 3. Given the capital allocation line, an investor's optimal portfolio is the portfolio that A) maximizes her expected profit. B) maximizes her risk. C) minimizes both her risk and return. D) maximizes her expected utility. E) none of the above. Answer: D Difficulty: Moderate Rationale: By maximizing expected utility, the investor is obtaining the best risk-return relationships possible and acceptable for her. Bodie, Investments, Sixth Edition...
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