Question 1

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:
A) 24%
B) 14%
C) 18%
D) 10%

Accepted Answer

C) 11ea7e5a_6e6d_6275_9a0a_9b520749a601_TB1623_11 = 11ea7e5a_6e6d_6276_9a0a_598f86a97a0d_TB1623_11 = 11ea7e5a_6e6d_6277_9a0a_af15ccacfa6f_TB1623_11 = 1.4 r_i = r_f + 11ea7e5a_6e6d_6278_9a0a_4de40e747b02_TB1623_11 × (E[R_p] - r_f) = .04 + (1.4)(.14 - .04) = .18

Question 2

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) decrease; exceeds B) increase; exceeds C) increase; goes below D) none of the above

Accepted Answer

According to the Sharpe ratio formula, increasing the amount invested in i would increase the expected return of the portfolio. If this expected return exceeds the required return given the portfolio, the Sharpe ratio would be positively impacted and increase. Therefore, choice B is the best selection.

Question 3

________ portfolio of risky securities must ________ the market portfolio.
A) The inefficient; equal
B) The efficient; not equal
C) The efficient; equal
D) The inefficient; not equal

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the efficient portfolio of risky securities must have the same expected return as the market portfolio. Therefore, the correct answer is C, which states that the efficient portfolio must equal the market portfolio. Answer A and D are incorrect because they mention inefficiency, which is not a characteristic of an efficient portfolio. Answer B is incorrect because, according to the CAPM, efficient portfolios must have the same expected return as the market portfolio.

Question 4

A portfolio is efficient if and only if the expected return of every available security equals its ________.
A) average return
B) weighted average return
C) realized return
D) required return

Accepted Answer

An efficient portfolio is a portfolio that provides the maximum possible expected return for a given level of risk, or the minimum possible risk for a given level of expected return. In order for a portfolio to be efficient, the expected return of every available security in the portfolio must equal its required return. This is the return that investors demand to invest in a security and is based on factors such as the risk level of the security and the current market conditions. Therefore, the best choice for the blank is D: required return.

Question 5

Which of the following statements is false? A) Because all other risk is diversifiable, it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk, and therefore determines its cost of capital. B) If a security's expected return exceeds its required return given our current portfolio, then we can improve the performance of our portfolio by adding more of the security. C) The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. D) As we buy shares of a security i, its correlation with our portfolio P will increase, ultimately raising its required return until E[R_i] = R_p.

Accepted Answer

D) As we buy shares of a security i, its correlation with our portfolio P will increase, ultimately raising its required return until E[Ri] = Ri.

Question 6

The efficient portfolio offers ________ Sharpe ratio and therefore ________ risk-return tradeoff available.
A) the highest; the best
B) the lowest; the best
C) the highest; the lowest
D) the lowest; the worst

Accepted Answer

The efficient portfolio offers the highest Sharpe ratio, which means it provides the best risk-return tradeoff available. Therefore, option A is the correct choice.

Question 7

To identify the efficient portfolio we must know ________,________,and ________ between investments.
A) risk level; required return; profitability
B) value of risk free; required return; correlations
C) expected return; volatilities; correlations
D) systematic risk; nonsystematic risk and required return

Accepted Answer

To identify the efficient portfolio, we must know the expected return, volatilities, and correlations between investments. These factors help in finding the optimal combination of assets that offer the highest return for a given level of risk or the lowest risk for a given level of return. The value of risk-free and required return are also important factors but they only come into play when constructing the capital market line or choosing the risk-free asset. Systematic risk, nonsystematic risk, and required return are not sufficient factors to identify the efficient portfolio.

Question 8

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:
A) -0.3
B) -0.6
C) 0.3
D) 0.6

Accepted Answer

A) 11ea7e5a_6e6c_9f1b_9a0a_b1655da8f20a_TB1623_11 = 11ea7e5a_6e6c_c62c_9a0a_bb97b63597c3_TB1623_11 = 11ea7e5a_6e6c_c62d_9a0a_816424b21d45_TB1623_11 = -0.3

Question 9

the CAPM allows us to identify the efficient portfolio of risky assets without having any knowledge of the ________ of each security.
A) systematic risk
B) common risk
C) diversifiable risk
D) expected return

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

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 11

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:
A) 1.25
B) 1.40
C) 0.70
D) 1.75

Accepted Answer

B) 11ea7e5a_6e6d_1452_9a0a_afc5c04b4a95_TB1623_11 = 11ea7e5a_6e6d_3b63_9a0a_23743b6c6404_TB1623_11 = 11ea7e5a_6e6d_3b64_9a0a_038162cfd06a_TB1623_11 = 1.4

Question 12

Which of the following statements is false? A) A portfolio is efficient if it has the highest possible Sharpe ratio; that is, it is efficient if it provides the largest increase in expected return possible for a given increase in volatility. B) The required return for an investment is equal to a risk premium that is equal to the risk premium of the investor's current portfolio scaled by . C) Increasing the investment in investment I will increase the Sharpe ratio of portfolio P if its expected return E[R_i] exceeds the required return r_i, which is given by r_i = r_f + × (E[R_p] - r_f). D) If a security i's expected return is less than the required return r_i, we should reduce our holding of security i.

Accepted Answer

B) The required return for an investment is equal to the risk-free interest rate plus a risk premium that is equal to the risk premium of the investorʹs current portfolio scaled by β pi.

Question 13

If investors have homogeneous expectations,then each investor will identify ________ portfolio as having ________ Sharpe ratio in the economy.
A) the same; the highest
B) a different; the highest
C) the same; the lowest
D) a different; the lowest

Accepted Answer

If investors have homogeneous expectations, then they all have the same views about the potential returns and risks of different portfolios. Therefore, they will identify the same portfolio as having the highest Sharpe ratio, which is the ratio of excess returns to volatility. In other words, they all agree on which portfolio offers the best risk-adjusted return.

Question 14

The efficient portfolio provides the benchmark that identifies ________ present in the economy.
A) the nonsystematic risk
B) the uncommon risk
C) the undiversifiable risk
D) the systematic risk

Accepted Answer

The efficient portfolio is comprised of assets with the lowest possible level of diversifiable risk or nonsystematic risk. Therefore, the remaining risk in the portfolio is systematic risk that cannot be diversified away. Thus, the efficient portfolio provides the benchmark that identifies systematic risk present in the economy.

Question 15

A portfolio is efficient if and only if ________ of every available security equals its ________.
A) the required return; expected return
B) the realized return; expected return
C) the expected return; required return
D) the required return; realized return

Accepted Answer

An efficient portfolio is one that provides the highest expected return for a given level of risk or the lowest level of risk for a given expected return. This means that the portfolio is balanced in such a way that the expected return of each security is equal to the required return needed to justify its risk. Therefore, the correct choice is C.

Question 16

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 Suppose that you want to maximize your...

Question 17

Which of the following statements is false?
A) The Sharpe ratio of the portfolio tells us how much our expected return will increase for a given increase in volatility.
B) We should continue to trade securities until the expected return of each security equals its required return.
C) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio.
D) If security i's required return exceeds its expected return, then adding more of it will improve the performance of the portfolio.

Accepted Answer

D) If security iʹs expected return exceeds its required return, then adding more of it will improve the performance of the portfolio.

Question 18

The required return is ________ that is necessary to compensate for the risk investment i will contribute to the portfolio.
A) the realized return
B) the highest return
C) the lowest return
D) the expected return

Accepted Answer

The required return is the expected return that investors require to compensate for the risk undertaken in the investment. Therefore, the correct choice is D, the expected return. Realized returns refer to the actual return earned on an investment, while the highest and lowest return are not relevant to determining the required return.

Question 19

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
A) systematic risk.
B) firm-specific risk.
C) unique risk.
D) independent risk.

Accepted Answer

The cost of capital of an investment is determined by its sensitivity to systematic risk, which is also known as market risk. Therefore, the expected return of the best available portfolio in the market with the same sensitivity to systematic risk is the appropriate benchmark for calculating the cost of capital. The other options (B, C, and D) are not relevant to the calculation of the cost of capital.

Question 20

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:
A) -3%
B) 4%
C) 1%
D) 10%

Accepted Answer

C) 11ea7e5a_6e6c_ed3e_9a0a_9f0e3e4e9c52_TB1623_11 = 11ea7e5a_6e6c_ed3f_9a0a_f3015738fcbc_TB1623_11 = 11ea7e5a_6e6c_ed40_9a0a_258e0222417e_TB1623_11 = -0.3 r_i = r_f + 11ea7e5a_6e6d_1451_9a0a_39e2c48e405f_TB1623_11 × (E[R_p] - r_f) = .04 + (-0.3)(.14 - .04) = .01

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

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)

portfolio of risky securities must the market portfolio.

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

Which of the following statements is false?

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

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

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?

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

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

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

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?

Which of the following statements is false?

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

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

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)

________ portfolio of risky securities must ________ the market portfolio.

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

Which of the following statements is false?

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

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

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?

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

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

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

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?

Which of the following statements is false?

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

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)

portfolio of risky securities must the market portfolio.

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

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

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

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