Question 1

Suppose that Fenner Smith  must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 75% and has a standard deviation of 15.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
A)4.
B)-2.
C)2.
D)-4.
E)6.

Accepted Answer

The slope of the budget line can be calculated by taking the difference in the expected returns of the two assets and dividing it by the difference in their standard deviations. Since one asset has an expected return of 75% with a standard deviation of 15% and the other has an expected return of 15% with zero standard deviation, the slope is (75% - 15%) / (15% - 0%) = 60% / 15% = 4.

Question 2

Suppose that Ms.Lynch  can make up her portfolio using a risk-free asset that offers a surefire rate of return of 10% and a risky asset with an expected rate of return of 20%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 17.50%, then the standard deviation of her return on this portfolio will be
A)3.75%.
B)7.50%.
C)6.75%.
D)1.88%.
E)None of the above.

Accepted Answer

The standard deviation of a portfolio that combines a risk-free asset and a risky asset is proportional to the amount invested in the risky asset. Since the expected return of the portfolio is 17.50%, which is 75% of the way from the risk-free rate of 10% to the risky asset's expected return of 20%, the standard deviation of the portfolio will be 75% of the risky asset's standard deviation. Thus, 0.75 * 5% = 3.75%.

Question 3

Suppose that Ms.Lynch can make up her portfolio using a risk-free asset that offers a surefire rate of return of 10% and a risky asset with an expected rate of return of 15%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 15%, then the standard deviation of her return on this portfolio will be
A)2.50%.
B)8%.
C)5%.
D)10%.
E)None of the above.

Accepted Answer

If Ms. Lynch chooses a portfolio with an expected rate of return of 15%, which is the same as the expected rate of return of the risky asset, it means her portfolio is entirely composed of the risky asset. Therefore, the standard deviation of her portfolio will be the same as the standard deviation of the risky asset, which is 5%.

Question 4

Suppose that Fenner Smith  must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 30% and has a standard deviation of 15.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
A)0.50.
B)-1.
C)-0.50.
D)1.
E)1.50.

Accepted Answer

The answer of Suppose that Fenner Smith  must divide...

Question 5

Suppose that Fenner Smith must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 25% and has a standard deviation of 10.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
A)1.
B)-1.
C)0.50.
D)-0.50.
E)1.50.

Accepted Answer

The slope of the budget line is the ratio of the difference in expected returns to the difference in standard deviations. In this case, the difference in expected returns is 25% - 15% = 10%, and the difference in standard deviations is 10% - 0% = 10%. Therefore, the slope of the budget line is 10% / 10% = 1.

Question 6

Suppose that Ms.Lynch can make up her portfolio using a risk-free asset that offers a surefire rate of return of 10% and a risky asset with an expected rate of return of 20%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 20%, then the standard deviation of her return on this portfolio will be
A)2.50%.
B)8%.
C)5%.
D)10%.
E)None of the above.

Accepted Answer

If Ms. Lynch chooses a portfolio with an expected rate of return of 20%, which matches the expected rate of return of the risky asset, it means her portfolio is entirely composed of the risky asset. Therefore, the standard deviation of her portfolio will be the same as that of the risky asset, which is 5%.

Question 7

Suppose that Fenner Smith must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 45% and has a standard deviation of 15.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
A)2.
B)1.
C)-1.
D)-2.
E)3.

Accepted Answer

The slope of the budget line between two assets in a portfolio is calculated by taking the difference in their expected returns and dividing it by the difference in their standard deviations. In this case, the standard deviation of the first asset is 0, making the denominator of the slope calculation the standard deviation of the second asset, which is 15. The numerator is the difference in expected returns, 45% - 15% = 30%. Therefore, the slope is 30%/15% = 2.

Question 8

Suppose that Ms.Lynch  can make up her portfolio using a risk-free asset that offers a surefire rate of return of 15% and a risky asset with an expected rate of return of 25%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 20%, then the standard deviation of her return on this portfolio will be
A)2.50%.
B)5%.
C)5.50%.
D)1.25%.
E)None of the above.

Accepted Answer

The standard deviation of a portfolio that combines a risk-free asset and a risky asset is proportional to the amount invested in the risky asset. Since the expected return of the portfolio (20%) is exactly in the middle of the risk-free rate (15%) and the risky asset's expected return (25%), it implies that the portfolio is composed of equal parts of the risk-free and risky assets. Therefore, the standard deviation of the portfolio will be half of the standard deviation of the risky asset alone, which is 5%/2 = 2.5%.

Question 9

Suppose that Ms.Lynch  can make up her portfolio using a risk-free asset that offers a surefire rate of return of 5% and a risky asset with an expected rate of return of 10%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 8.75%, then the standard deviation of her return on this portfolio will be
A)7.50%.
B)3.75%.
C)1.88%.
D)6.75%.
E)None of the above.

Accepted Answer

The portfolio's expected return is a weighted average of the risk-free and risky asset returns. Solving for the weight of the risky asset (w) in the portfolio: 0.05(1-w) + 0.10w = 0.0875 gives w = 0.75. The standard deviation of the portfolio is then 0.75 * 5% = 3.75%.

Question 10

Suppose that Fenner Smith  must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 45% and has a standard deviation of 10.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combination that Smith can obtain, the slope of this budget line is
A)1.50.
B)-1.50.
C)-3.
D)3.
E)4.50.

Accepted Answer

The slope of the budget line between two assets in a portfolio is calculated by the difference in their expected returns divided by the difference in their standard deviations. Since one asset has a standard deviation of zero, the slope is simply the difference in returns (45% - 15%) divided by the standard deviation of the risky asset (10%), which equals 3.

Quiz 12: Risky Assets-Part B