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Homework1_Spring_2010_Investment

# Homework1_Spring_2010_Investment - Homework 1 FINC 414...

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Homework 1 FINC 414 Investment Spring 2010 (Due on March 30, 2010) Name: Hoa Thi Thanh Le 1. An investor with a degree of risk aversion A-5 will demand a risk premium of _____ on a portfolio with a standard deviation of 10%. A) 0.25% B) 0.50% C) 2.5% D) 5.0% 2. The complete portfolio refers to the investment in __________. A) the risk-free asset B) the risky portfolio C) the sum of a and b D) the difference between a and b 3. Suppose you pay \$9,700 for a Treasury bill maturing in three months. What is the holding period return for this investment? A) 3% B) 3.1% C) 12.4% D) 16.7% 4. Suppose you pay \$9,800 for a Treasury bill maturing in two months. What is the annual percentage rate of return for this investment? A) 2% B) 12% C) 12.2% D) 16.4% 5. Suppose you pay \$9,700 for a Treasury bill maturing in six months. What is the effective annual rate of return for this investment? = A) 3.1% B) 6% C) 6.18% D) 6.28%

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6. 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 7. 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 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. A treasury bill pays 5%. __________ would definitely not be chosen by a risk adverse investor. A) An asset that pays 10% with a probability of 60% or 2% with probability of 40% B) An asset that pays 10% with a probability of 40% or 2% with a probability of 60% C) An asset that pays 10% with a probability of 20% or 3.75% with a probability of 80% D) An asset that pays 10% with a probability of 30% or 3.75% with a probability of 70%
10. Consider the following two investment alternatives. First, a risky portfolio that pays 15% rate

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Homework1_Spring_2010_Investment - Homework 1 FINC 414...

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