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Chap007 - Chapter 7 Capital Allocation Between the Risky...

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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 ? 3. Given the capital allocation line, an investor's optimal portfolio is the portfolio that Bodie, Investments, Sixth Edition 1
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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. 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.
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