Chp 6-8 Study Guide

Chp 6-8 Study Guide - ch6(sample) 1. A probability...

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ch6(sample) 1. A probability distribution for HPRs lets us derive measurements for the ______ of the investment. A. risk B. reward C. both a and b above D. none of the above 2. The complete portfolio refers to the dollar investment in __________. A. the risk-free asset B. the risky portfolio C. the total of both a and b D. the difference between a and b 3. The reward/variability ratio is given by __________. A. the slope of the capital allocation line B. the second derivative of the capital allocation line C. the point at which the second derivative of the investor's indifference curve reaches zero D. none of the above 4. The capital allocation line is also 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 5. __________ is a true statement. A. Risk-averse investors reject investments that are fair games B. Risk-neutral investors judge risky investments only by their expected returns C. both a and b D. neither a nor b
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6. A Treasury bill pays a 6% rate of return. A risk averse investor __________ invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because __________. A. might; she is rewarded a risk premium B. would not; because she is not rewarded any risk premium C. would not; because the risk premium is small D. cannot be determined 7. Rational (i.e., risk averse) Investors wanting to reduce the risk of their portfolio should _____. A. put fewer risky assets in their risky portfolio B. shift wealth from the risky portfolio to the risk-free asset C. shift wealth into less risky assets in the risky portfolio D. none of the above 8. Consider a treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor would choose as part of his complete portfolio would be __________. A. security A B. security B C. security C D. security D 9. An investor invests 40% of his wealth in a risky asset with an expected rate of return of 15% and a variance of 4% and 60% in a treasury bill that pays 6%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively. A. 8.0%, 12% B. 9.6%, 8% C. 9.6%, 10% D. 11.4%, 12%
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10. Consider the following two investment alternatives. First, a risky portfolio that pays 15% rate of return with a probability of 60% or 5% with a probability of 40%. Second, a treasury bill that pays 6%. The risk premium on the risky investment is __________. A. 1%
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Chp 6-8 Study Guide - ch6(sample) 1. A probability...

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