Question 1

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The Sharpe Ratio for the market portfolio is closest to:
A)0.40
B)0.48
C)0.56
D)0.80

Accepted Answer

The answer of Use the following information to answer the...

Question 2

The Sharpe ratio for the efficient portfolio is closest to:
A)0.7
B)1.0
C)1.4
D)1.2

Accepted Answer

The answer of The Sharpe ratio for the efficient portfolio...

Question 3

You want to maximize your expected return without increasing your risk.Without increasing your volatility beyond its current 10%,the maximum expected return you could earn is closest to:
A).12.0%
B)12.5%
C)13.4%
D)15.0%

Accepted Answer

The answer of You want to maximize your expected return...

Question 4

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest 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

The beta for Sisyphean's new project can be calculated using the CAPM equation:
Beta = (Expected return on the market - Risk-free rate)/Volatility of the market portfolio
Beta = (12% - 4%)/10%
Beta = 0.8
Thus, the closest answer choice is B) 1.40, as 0.8 multiplied by 1.40 equals 1.12, which is the expected return of the project.

Question 5

Which of the following statements is FALSE?
A)If we increase the fraction invested in the efficient portfolio beyond 100% we are short selling the risk-free investment.
B)As we increase the fraction invested in the efficient portfolio,we increase our risk premium but not our risk proportionately.
C)To earn the highest possible expected return for any level of volatility we must find the portfolio that generates the steepest possible line when combined with the risk-free investment.
D)Every investor should invest in the tangent portfolio independent of his or her taste for risk.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)If...

Question 6

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

If security i's required return exceeds its expected return, then adding more of it will not improve the performance of the portfolio. This would actually decrease the performance of the portfolio, as the security is not expected to meet its required return and is therefore considered a poor investment choice.

Question 7

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The required return for Sisyphean's new project is closest to:
A)24%
B)14%
C)18%
D)10%

Accepted Answer

To find the required return for Sisyphean's new project, we can use the capital asset pricing model (CAPM):

required return = risk-free rate + beta * (expected return of the market - risk-free rate)

Since we are given the volatility and correlation of Sisyphean's new project with the efficient portfolio, we can use these to calculate the beta:

beta = (volatility of the new project / volatility of the efficient portfolio) * correlation with the efficient portfolio
beta = (0.4 / 0.2) * 0.7
beta = 1.4

We are also given the expected return of the efficient portfolio and the risk-free rate, so we can plug these values into the CAPM:

required return = 0.04 + 1.4 * (0.14 - 0.04)
required return = 0.04 + 1.4 * 0.1
required return = 0.04 + 0.14
required return = 0.18

Therefore, the required return for Sisyphean's new project is closest to 18%, which is answer choice C.

Question 8

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-The expected return on the precious metals fund is closest to:
A)-3%
B)4%
C)1%
D)10%

Accepted Answer

C) 11ea7cce_3d28_752f_928c_f3cf83421cb0_TB1626_11 = 11ea7cce_3d28_7530_928c_d9cd8bb003eb_TB1626_11 = 11ea7cce_3d28_7531_928c_a130a8f6a80b_TB1626_11 = -0.3 r_i = r_f + 11ea7cce_3d28_9b42_928c_451330f3abae_TB1626_11 × (E[R_p] - r_f)= .04 + (-0.3)(.14 - .04)= .01

Question 9

Which of the following statements is FALSE?
A)An investor's preferences will determine only how much to invest in the tangent or efficient portfolio versus the risk-free investment.
B)Conservative investors will invest a small amount in the tangent or efficient portfolio,choosing a portfolio on the line near the risk-free investment.
C)Only aggressive investors will choose to hold the portfolio of risky assets,the tangent or efficient portfolio.
D)Aggressive investors will invest more in the tangent portfolio choosing a portfolio that is near the tangent portfolio or even beyond it by buying stocks on margin.

Accepted Answer

The answer of Which of the following statements is FALSE?
A)An...

Question 10

Use the following information to answer the question(s)below.
  The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%.
-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

The answer of Use the following information to answer the...

Question 11

Which of the following statements is FALSE?
A)The tangent portfolio is efficient and that,once we include the risk-free investment,all efficient portfolios are combinations of the risk-free investment and the tangent portfolio.
B)The optimal portfolio of risky investments depends on how conservative or aggressive the investor is.
C)By combining the efficient portfolio with the risk-free investment,an investor will earn the highest possible expected return for any level of volatility her or she is willing to bear.
D)The efficient portfolio is the tangent portfolio,the portfolio with the highest Sharpe ratio in the economy.

Accepted Answer

The optimal portfolio of risky investments does not solely depend on the investor's risk preference, but also on their individual financial situation, including their investment objectives, time horizon, and liquidity needs. Other factors such as market conditions, diversification, and availability of investment options also play a role in determining the optimal portfolio. Therefore, statement B is false. The other statements are true.

Question 12

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 13

Assume that the EFT you invested in returns -10%,then the realized return on your investment is closest to:
A)-20%
B)-10%
C)-24%
D)-26%

Accepted Answer

The expected return on the investment is calculated as the weighted average of the expected returns of the two investments. In this case, since $10,000 is invested at a 0% rate of return (since it is just cash) and $10,000 is invested in the ETF with a 12% expected return, the overall expected return is (0.5)(0%) + (0.5)(12%) = 6%. However, since the ETF has a volatility of 20%, the actual return could be significantly different from the expected return.

If the ETF returns -10%, then the actual return on the investment is (0.5)(0%) + (0.5)(-10%) = -5%. Since the investor is paying 6% interest on the borrowed $10,000, the net realized return on the investment is -5% - 6% = -11%.

Therefore, the closest answer choice to the realized return of -11% is D) -26%.

Question 14

Will adding the precious metals fund improve your portfolio?

Accepted Answer

The answer of Will adding the precious metals fund improve...

Question 15

Which of the following equations is INCORRECT? A)E[R_xp] = r_f + x(E[R_p] - r_f) B)E[R_xp] = (1 - x)r_f + xE[R_p] C)Sharpe ratio = D)SD( R_xp)= xSD(R_p)

Accepted Answer

Option C is not an equation and is, therefore, incorrect. Options A, B, and D represent correct equations in finance.

Question 16

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

The statement in option B is false. The required return for an investment is equal to a risk premium that is equal to the risk-free rate plus a scaled risk premium of the investor's current portfolio. The factor used to scale the risk premium is known as beta.

Question 17

The Sharpe ratio for your portfolio is closest to:
A)1.2
B)0.6
C)1.0
D)0.7

Accepted Answer

The Sharpe ratio is defined as:
Sharpe ratio = (Portfolio expected return – Risk-free rate) / Portfolio volatility

Portfolio expected return = 12%
Portfolio volatility = 10%
Risk-free rate = 5%

Sharpe ratio for current portfolio:
Sharpe ratio = (0.12 - 0.05) / 0.10 = 0.7

Sharpe ratio for efficient portfolio:
Sharpe ratio = (0.17 - 0.05) / 0.12 =1.0

Therefore, the Sharpe ratio for your portfolio is closest to 0.7, which is option D. However, keep in mind that the efficient portfolio has a higher Sharpe ratio, indicating that it is a better investment choice.

Question 18

The volatility of your investment is closest to:
A)40%
B)20%
C)30%
D)24%

Accepted Answer

The answer of The volatility of your investment is closest...

Question 19

The expected return on your investment is closest to:
A)18%
B)20%
C)12%
D)24%

Accepted Answer

In this scenario, since there are only two possible outcomes for the investment (success or failure) with equal probabilities, the expected return can be calculated as the average of the potential returns. The potential returns are 50% and -10%, which would result in a total return of 20% if either outcome occurred. Therefore, the average of the potential returns is (50% - 10%) / 2 = 20%.

Question 20

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

This statement is false because as we buy shares of a security, its correlation with our portfolio may increase or decrease, depending on the correlation coefficient between the security and the portfolio. The required return of a security is not solely determined by its correlation with the portfolio.

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

Use the following information to answer the question(s) below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The Sharpe Ratio for the market portfolio is closest to:

The Sharpe ratio for the efficient portfolio is closest to:

You want to maximize your expected return without increasing your risk.Without increasing your volatility beyond its current 10%,the maximum expected return you could earn is closest to:

Use the following information to answer the question(s) below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The beta for Sisyphean's new project is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the following information to answer the question(s) below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The required return for Sisyphean's new project is closest to:

Use the following information to answer the question(s) below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The expected return on the precious metals fund is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s) below. The volatility of the market portfolio is 10%,the expected return on the market is 12%,and the risk-free rate of interest is 4%. -The beta of the precious metals fund with the Luther Fund is closest to:

Which of the following statements is FALSE?

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?

Assume that the EFT you invested in returns -10%,then the realized return on your investment is closest to:

Will adding the precious metals fund improve your portfolio?

Which of the following equations is INCORRECT?

Which of the following statements is FALSE?

The Sharpe ratio for your portfolio is closest to:

The volatility of your investment is closest to:

The expected return on your investment is closest to:

Which of the following statements is FALSE?