Question 1

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. A portfolio that has an expected outcome of $114 is formed by

Accepted Answer

The expected outcome of $114 from an initial investment of $100 implies a 14% return. Option C, borrowing at the risk-free rate and investing a larger amount in the risky asset, is a strategy that can potentially amplify returns to meet the desired outcome, given the higher expected rate of return of the risky asset compared to the risk-free rate.

Question 2

The expected return of a two asset portfolio with a correlation coefficient of .35 will be _______________ the weighted average expected return of the portfolio.

Accepted Answer

The expected return of a two-asset portfolio is calculated as the weighted average of the expected returns of the individual assets, regardless of their correlation coefficient. The correlation affects the portfolio's risk, not its expected return.

Question 3

For capital investments where the forecasted return is below the investor's required return and above the capital market line, the investment is likely ________________.

Accepted Answer

If the forecasted return is below the investor's required return but above the capital market line, the investment is considered overvalued because it does not meet the investor's return expectations despite its favorable position relative to the capital market line.

Question 4

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 0.13?

Accepted Answer

To achieve an expected portfolio return of 0.13, you need to invest more than 100% in the risky asset and borrow at the risk-free rate. The weights can be calculated using the formula: 0.13 = w * 0.11 + (1-w) * 0.045, solving gives w = 130.77% in the risky asset and -30.77% in the risk-free asset.

Question 5

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. 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 0.08?

Accepted Answer

To achieve a portfolio standard deviation of 0.08, you need to solve for the weights using the formula for portfolio standard deviation. The weight of the risky asset (w) is calculated as 0.08 / 0.21 = 0.381, meaning 38.1% in the risky asset and 61.9% in the risk-free asset.

Question 6

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to

Accepted Answer

The answer of You invest $100 in a risky asset...

Question 7

The standard deviation of a two asset portfolio with a correlation coefficient of .35 will be _______________ the weighted average standard deviation of the portfolio.

Accepted Answer

The standard deviation of a two-asset portfolio with a correlation coefficient other than 1 will be below the weighted average standard deviation of the portfolio due to the diversification effect.

Question 8

The reduction in standard deviation from a well diversified portfolio of 100 stocks will ______________ than that of a 200 stock portfolio.

Accepted Answer

The reduction in standard deviation from a well-diversified portfolio tends to diminish as more stocks are added. Beyond a certain point, adding more stocks (e.g., going from 100 to 200) does not significantly reduce risk due to the law of diminishing marginal returns on diversification.

Question 9

For capital investments where the forecasted return is above the investor's required return and below the capital market line, the investment is likely ________________.

Accepted Answer

If the forecasted return of a capital investment is above the investor's required return but below the capital market line, it indicates that the investment offers a higher return than what the investor demands for its risk level, yet it does not reach the optimal risk-return trade-off represented by the capital market line. This scenario suggests the investment is undervalued because it provides a higher return than required for its risk, implying it could be a good opportunity for investment.

Quiz 6: Capital Allocation to Risky Assets