Question 1

________ portfolio of risky securities must ________ the market portfolio.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the efficient portfolio of risky securities, which is the portfolio that efficiently balances risk and return, must have the same proportions of assets as the market portfolio. This is because the market portfolio represents the optimal portfolio of all risky assets available in the market, and any portfolio that deviates from it is considered inefficient. Therefore, the efficient portfolio must be equal to the market portfolio in terms of proportions, while any inefficient portfolio can be either equal or not equal to the market portfolio.

Question 2

Use the information for the question(s) below.
You are presently invested in the Luther Fund, a broad-based mutual fund that invests in stocks and other securities. The Luther Fund has an expected return of 14% and a volatility of 20%. Risk-free Treasury Bills are currently offering returns of 4%. You are considering adding a precious metals fund to your current portfolio. The metals fund has an expected return of 10%, a volatility of 30%, and a correlation of -.20 with the Luther Fund.
-The beta of the precious metals fund with the Luther Fund  is closest to:

Accepted Answer

A) 11ea7db1_bd19_32e1_b9bd_29836ed6f637_TB1619_11 = 11ea7db1_bd19_32e2_b9bd_ab0b00e2d5fd_TB1619_11 = 11ea7db1_bd19_32e3_b9bd_2b38192846d5_TB1619_11 = -0.3

Question 3

Use the information for the question(s) below.
You are presently invested in the Luther Fund, a broad-based mutual fund that invests in stocks and other securities. The Luther Fund has an expected return of 14% and a volatility of 20%. Risk-free Treasury Bills are currently offering returns of 4%. You are considering adding a precious metals fund to your current portfolio. The metals fund has an expected return of 10%, a volatility of 30%, and a correlation of -.20 with the Luther Fund.
-The expected return on the precious metals fund is closest to:

Accepted Answer

C) 11ea7db1_bd19_59f4_b9bd_ed00256fcc84_TB1619_11 = 11ea7db1_bd19_8105_b9bd_f1249a71f708_TB1619_11 = 11ea7db1_bd19_8106_b9bd_95caad5bdf0c_TB1619_11 = -0.3 r_i = r_f + 11ea7db1_bd19_8107_b9bd_45a1b8195586_TB1619_11 × (E[R_p] - r_f) = .04 + (-0.3)(.14 - .04) = .01

Question 4

The cost of capital of investment i is equal to the expected return of the best available portfolio in the market with the same sensitivity to

Accepted Answer

The cost of capital of an investment is determined by the expected return of the best available portfolio in the market that has the same sensitivity to systematic risk or market risk. This is because systematic risk cannot be diversified away and is inherent in the overall market. Firm-specific risk or unique risk can be diversified away, but market or systematic risk cannot be. Therefore, A is the best choice in this scenario.

Question 5

The efficient portfolio offers ________ Sharpe ratio and therefore ________ risk-return tradeoff available.

Accepted Answer

The efficient portfolio offers the highest Sharpe ratio, which means it has the best risk-adjusted return. Therefore, A is the best choice as it provides the highest return for a given level of risk.

Question 6

The efficient portfolio provides the benchmark that identifies ________ present in the economy.

Accepted Answer

The efficient portfolio is a portfolio that provides the maximum return for a given level of risk or the minimum risk for a given level of return. It includes only the systematic risk, also known as undiversifiable risk, which is the risk that affects the overall market or economy and cannot be eliminated through diversification. Therefore, the efficient portfolio provides the benchmark that identifies the systematic risk present in the economy.

Question 7

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.

Accepted Answer

The required return is the expected return that is necessary to compensate for the risk an investment will contribute to the portfolio. The expected return takes into account the probability of different outcomes and their associated returns, making it a more realistic measure of what an investor can expect to earn on a given investment. The realized return is the actual return earned on an investment, which may be higher or lower than the expected return due to unforeseen factors or events. The highest and lowest return are not relevant to determining the required return, as they do not take into account the risk associated with the investment.

Question 8

Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[R_i] ________ the required return given portfolio P defined as in Formula (11.20)

Accepted Answer

According to the Sharpe ratio formula, an increase in the amount invested in i will increase the numerator (portfolio excess return) and keep the denominator (portfolio risk) constant, thereby increasing the Sharpe ratio. If the expected return E[R_i] exceeds the required return given portfolio P, it implies that the portfolio is generating excess returns and is efficient. In this case, increasing the amount invested in i will further increase the excess returns and improve the portfolio's efficiency, leading to an increase in the Sharpe ratio. Thus, the correct answer is choice B.

Question 9

the CAPM allows us to identify the efficient portfolio of risky assets without having any knowledge of the ________ of each security.

Accepted Answer

The Capital Asset Pricing Model (CAPM) allows for the identification of the efficient portfolio of risky assets without requiring knowledge of the expected return of each security. It does so by focusing on the relationship between an asset's risk relative to the market (systematic risk) and its expected return, rather than the individual expected returns of securities.

Question 10

Which of the following statements is false?

Accepted Answer

Statement D is false. As we buy shares of a security i, its correlation with our portfolio P will increase, ultimately raising its required return until E[RS1U1B1iS1U1B0] > RS1U1B1pS1U1B0, where RS1U1B1i is the required return on security i, S1U1B1i and S1U1B1p are the standard deviations of i and the portfolio P, and B1i and B1p are their respective betas.

Question 11

A portfolio is efficient if and only if the expected return of every available security equals its ________.

Accepted Answer

A portfolio is efficient only if the expected return of every available security equals its required return. This ensures that the portfolio is appropriately compensated for its risk and provides the highest return for a given level of risk. The other options are not necessarily equal to the required return and may result in an inefficient portfolio.

Question 12

A portfolio is efficient if and only if ________ of every available security equals its ________.

Accepted Answer

An efficient portfolio is one in which the expected return of every available security equals its required return, meaning the portfolio is achieving the highest return possible for a given level of risk. The realized return (actual return earned) is not as relevant in determining portfolio efficiency as it is a historical measure, while the expected and required return are forward-looking elements. Therefore, option C is the correct answer.

Question 13

Which of the following statements is false?

Accepted Answer

The required return for an investment is not necessarily equal to a risk premium that is equal to the risk premium of the investor's current portfolio scaled by a factor of 11ea7db1_bd18_bdae_b9bd_37fdb7fdb9e3_TB1619_11. This statement oversimplifies the calculation of required return and ignores factors such as inflation and the investor's individual risk tolerance.

Question 14

Use the information for the question(s) below.
Sisyphean Industries is seeking to raise capital from a large group of investors to fund a new project. Suppose that the efficient portfolio has an expected return of 14% and a volatility of 20%. Sisyphean's new project is expected to have a volatility of 40% and a 70% correlation with the efficient portfolio. The risk-free rate is 4%.
-The required return for Sisyphean's new project is closest to:

Accepted Answer

C) 11ea7db1_bd1a_1d4b_b9bd_ad7b98598eb8_TB1619_11 = 11ea7db1_bd1a_1d4c_b9bd_9fd9c93dc358_TB1619_11 = 11ea7db1_bd1a_445d_b9bd_a3bd6e8332c9_TB1619_11 = 1.4 r_i = r_f + 11ea7db1_bd1a_445e_b9bd_fd82a090d852_TB1619_11 × (E[R_p] - r_f) = .04 + (1.4)(.14 - .04) = .18

Question 15

To identify the efficient portfolio we must know ________,________,________ between investments.

Accepted Answer

To identify the efficient portfolio, we need to consider the expected return, volatilities and correlations between investments. Expected return and volatility help us to quantify the risk and return potential of individual investments. Correlations help us to understand how the investments move in relation to each other, which is important when constructing a diversified portfolio. The value of risk-free investments, required return, systematic and nonsystematic risk are also important factors, but they are not sufficient on their own to identify the efficient portfolio.

Question 16

If investors have homogeneous expectations,then each investor will identify ________ portfolio as having ________ Sharpe ratio in the economy.

Accepted Answer

If investors have homogeneous expectations, then they will all have the same view of the economy, leading them to identify the same portfolio as the one with the highest Sharpe ratio. This is because in a world of homogeneous expectations, no investor believes they can possess information not known to others. Thus, all investors would behave in the same way and hold the same portfolio that gives the highest expected returns per unit of risk taken on.

Question 17

Use the information for the question(s) below.
You are presently invested in the Luther Fund, a broad-based mutual fund that invests in stocks and other securities. The Luther Fund has an expected return of 14% and a volatility of 20%. Risk-free Treasury Bills are currently offering returns of 4%. You are considering adding a precious metals fund to your current portfolio. The metals fund has an expected return of 10%, a volatility of 30%, and a correlation of -.20 with the Luther Fund.
-Will adding the precious metals fund improve your portfolio?

Accepted Answer

The answer of Use the information for the question(s) below.
You...

Question 18

Which of the following statements is false?

Accepted Answer

If a security's required return exceeds its expected return, adding more of it to the portfolio will drag down the overall performance of the portfolio. This statement is false.

Question 19

Use the information for the question(s) below.
Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 10%. The efficient (tangent) portfolio has an expected return of 17% and a volatility of 12%. The risk-free rate of interest is 5%.
-Suppose that you want to maximize your expected return without increasing your risk.How can you achieve this goal? Without increasing your risk,what is the maximum expected return you can expect?

Accepted Answer

The answer of Use the information for the question(s) below.
Suppose...

Question 20

Use the information for the question(s) below.
Sisyphean Industries is seeking to raise capital from a large group of investors to fund a new project. Suppose that the efficient portfolio has an expected return of 14% and a volatility of 20%. Sisyphean's new project is expected to have a volatility of 40% and a 70% correlation with the efficient portfolio. The risk-free rate is 4%.
-The beta for Sisyphean's new project is closest to:

Accepted Answer

B) 11ea7db1_bd19_cf28_b9bd_ed44a564eb49_TB1619_11 = 11ea7db1_bd19_cf29_b9bd_df7702e45127_TB1619_11 = 11ea7db1_bd19_f63a_b9bd_6b8ef83a2d00_TB1619_11 = 1.4

Quiz 11: Optimal Portfolio Choice and the Capital Asset Pricing Model

portfolio of risky securities must the market portfolio.

The cost of capital of investment i is equal to the expected return of the best available portfolio in the market with the same sensitivity to

The efficient portfolio offers Sharpe ratio and therefore risk-return tradeoff available.

The efficient portfolio provides the benchmark that identifies ________ present in the economy.

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.

Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[R_i] ________ the required return given portfolio P defined as in Formula (11.20)

the CAPM allows us to identify the efficient portfolio of risky assets without having any knowledge of the ________ of each security.

Which of the following statements is false?

A portfolio is efficient if and only if the expected return of every available security equals its ________.

A portfolio is efficient if and only if of every available security equals its .

Which of the following statements is false?

To identify the efficient portfolio we must know ,, between investments.

If investors have homogeneous expectations,then each investor will identify portfolio as having Sharpe ratio in the economy.

Which of the following statements is false?

Quiz 11: Optimal Portfolio Choice and the Capital Asset Pricing Model

________ portfolio of risky securities must ________ the market portfolio.

The cost of capital of investment i is equal to the expected return of the best available portfolio in the market with the same sensitivity to

The efficient portfolio offers ________ Sharpe ratio and therefore ________ risk-return tradeoff available.

The efficient portfolio provides the benchmark that identifies ________ present in the economy.

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.

Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[Ri] ________ the required return given portfolio P defined as in Formula (11.20)

the CAPM allows us to identify the efficient portfolio of risky assets without having any knowledge of the ________ of each security.

Which of the following statements is false?

A portfolio is efficient if and only if the expected return of every available security equals its ________.

A portfolio is efficient if and only if ________ of every available security equals its ________.

Which of the following statements is false?

To identify the efficient portfolio we must know ________,________,________ between investments.

If investors have homogeneous expectations,then each investor will identify ________ portfolio as having ________ Sharpe ratio in the economy.

Which of the following statements is false?

portfolio of risky securities must the market portfolio.

The efficient portfolio offers Sharpe ratio and therefore risk-return tradeoff available.

Increasing the amount invested in i will ________ the Sharpe ratio of portfolio P if its expected return E[R_i] ________ the required return given portfolio P defined as in Formula (11.20)

A portfolio is efficient if and only if of every available security equals its .

To identify the efficient portfolio we must know ,, between investments.

If investors have homogeneous expectations,then each investor will identify portfolio as having Sharpe ratio in the economy.