1. Which of the following statements regarding risk-averse investors is true?

A. They only care about the rate of

return.
B. They accept investments that are fair
games.
C. They only accept risky investments that offer risk premiums over the
risk-free rate.
D. They are willing to accept lower returns and
high risk.
E. They only care about the rate of return, and they accept investments that
are fair games.

2. Which of the following statements is(are) true?

I) Risk-averse investors reject investments that are fair games.

II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.

A. I
only
B. II
only
C. I and II
only
D. II and III
only
E. II, III, and IV
only
3. Which of the following statements is(are) false?

I) Risk-averse investors reject investments that are fair games.

II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.

A. I
only
B. II
only
C. I and II
only
D. II and III
only
E. III and IV
only

4. In the mean-standard deviation graph an indifference curve has a ________

slope.

A. negativ
e
B. zer
o
C. positiv
e
D. vertic
al
E. cannot be
determined

5. In the mean-standard deviation graph, which one of the following statements

is true regarding the indifference curve of a risk-averse investor?

A. It is the locus of portfolios that have the same expected rates of return and
different standard deviations.
B. It is the locus of portfolios that have the same standard deviations and
different rates of return.
C. It is the locus of portfolios that offer the same utility according to returns
and standard deviations.
D. It connects portfolios that offer increasing utilities according to returns and
standard deviations.
E. None of the
options
6. In a return-standard deviation space, which of the following statements is(are)
true for risk-averse investors? (The vertical and horizontal lines are referred to
as the expected return-axis and the standard deviation-axis, respectively.)

I) An investor's own indifference curves might intersect.

II) Indifference curves have negative slopes.
III) In a set of indifference curves, the highest offers the greatest utility.
IV) Indifference curves of two investors might intersect.

A. I and II
only
B. II and III
only
C. I and IV
only
D. III and IV
only
E. None of the
options

7. Elias is a risk-averse investor. David is a less risk-averse investor than Elias.

Therefore,

A. for the same risk, David requires a higher rate of return

than Elias.
B. for the same return, Elias tolerates higher risk
than David.
C. for the same risk, Elias requires a lower rate of return
than David.
D. for the same return, David tolerates higher risk
than Elias.
E. Cannot be
determined
8. When an investment advisor attempts to determine an investor's risk
tolerance, which factor would they be least likely to assess?

A. The investor's prior investing

experience
B. The investor's degree of financial
security
C. The investor's tendency to make risky or conservative
choices
D. The level of return the investor
prefers
E. The investor's feelings about
loss

9. Assume an investor with the following utility function: U = E(r) - 3/2(s2).

To maximize her expected utility, she would choose the asset with an
expected rate of return of _______ and a standard deviation of ________,
respectively.

A. 12%;
20%
B. 10%;
15%
C. 10%;
10%
D. 8%;
10%

[Link] an investor with the following utility function: U = E(r) - 3/2(s2).

To maximize her expected utility, which one of the following investment

alternatives would she choose?

A. A portfolio that pays 10% with a 60% probability or 5% with 40%

probability.
B. A portfolio that pays 10% with 40% probability or 5% with a 60%
probability.
C. A portfolio that pays 12% with 60% probability or 5% with 40%
probability.
D. A portfolio that pays 12% with 40% probability or 5% with 60%
probability.
11.A portfolio has an expected rate of return of 0.15 and a standard deviation of
0.15. The risk-free rate is 6%. An investor has the following utility function: U =
E(r) - (A/2)s2. Which value of A makes this investor indifferent between the
risky portfolio and the risk-free asset?

A. 5
B. 6
C. 7
D. 8

[Link] to the mean-variance criterion, which one of the following

investments dominates all others?

A. E(r) = 0.15; Variance =

0.20
B. E(r) = 0.10; Variance =
0.20
C. E(r) = 0.10; Variance =
0.25
D. E(r) = 0.15; Variance =
0.25
E. None of these options dominates the other
alternatives.

[Link] a risky portfolio, A, with an expected rate of return of 0.15 and a

standard deviation of 0.15, that lies on a given indifference curve. Which one
of the following portfolios might lie on the same indifference curve?

A. E(r) = 0.15; Standard deviation

= 0.20
B. E(r) = 0.15; Standard deviation
= 0.10
C. E(r) = 0.10; Standard deviation
= 0.10
D. E(r) = 0.20; Standard deviation
= 0.15
E. E(r) = 0.10; Standard deviation
= 0.20
14.

U = E(r) - (A/2)s2,where A = 4.0.

Based on the utility function above, which investment would you select?

A. 1
B. 2
C. 3
D. 4
E. Cannot tell from the information
given

15.

U = E(r) - (A/2)s2,where A = 4.0.

Which investment would you select if you were risk neutral?

A. 1
B. 2
C. 3
D. 4
E. Cannot tell from the information
given
16.

U = E(r) - (A/2)s2,where A = 4.0.

The variable (A) in the utility function represents the

A. investor's return
requirement.
B. investor's aversion to
risk.
C. certainty-equivalent rate of the
portfolio.
D. minimum required utility of the
portfolio.

[Link] exact indifference curves of different investors

A. cannot be known with perfect

certainty.
B. can be calculated precisely with the use of advanced
calculus.
C. although not known with perfect certainty, do allow the advisor to create
more suitable portfolios for the client.
D. cannot be known with perfect certainty and although not known with perfect
certainty, do allow the advisor to create more suitable portfolios for the
client.

[Link] riskiness of individual assets

A. should be considered for the asset in

isolation.
B. should be considered in the context of the effect on overall
portfolio volatility.
C. should be combined with the riskiness of other individual assets in the
proportions these assets constitute the entire portfolio.
D. should be considered in the context of the effect on overall portfolio
volatility and should be combined with the riskiness of other individual
assets in the proportions these assets constitute the entire portfolio.
19.A fair game

A. will not be undertaken by a risk-averse

investor.
B. is a risky investment with a zero risk
premium.
C. is a riskless
investment.
D. will not be undertaken by a risk-averse investor and is a risky investment
with a zero risk premium.
E. will not be undertaken by a risk-averse investor and is a riskless
investment.

[Link] presence of risk means that

A. investors will lose

money.
B. more than one outcome is
possible.
C. the standard deviation of the payoff is larger than its
expected value.
D. final wealth will be greater than initial
wealth.
E. terminal wealth will be less than initial
wealth.

[Link] utility score an investor assigns to a particular portfolio, other things

equal,

A. will decrease as the rate of return

increases.
B. will decrease as the standard deviation
decreases.
C. will decrease as the variance
decreases.
D. will increase as the variance
increases.
E. will increase as the rate of return
increases.
[Link] certainty equivalent rate of a portfolio is

A. the rate that a risk-free investment would need to offer with certainty to be
considered equally attractive as the risky portfolio.
B. the rate that the investor must earn for certain to give up the use of
his money.
C. the minimum rate guaranteed by institutions such
as banks.
D. the rate that equates "A" in the utility function with the average risk
aversion coefficient for all risk-averse investors.
E. represented by the scaling factor "-.005" in the utility
function.

[Link] to the mean-variance criterion, which of the statements below is

correct?

A. Investment B dominates
investment A.
B. Investment B dominates
investment C.
C. Investment D dominates all of the other
investments.
D. Investment D dominates only
investment B.
E. Investment C dominates
investment A.
[Link] is more risk-averse than Edie. On a graph that shows Steve and Edie's
indifference curves, which of the following is true? Assume that the graph
shows expected return on the vertical axis and standard deviation on the
horizontal axis.

I) Steve and Edie's indifference curves might intersect.

II) Steve's indifference curves will have flatter slopes than Edie's.
III) Steve's indifference curves will have steeper slopes than Edie's.
IV) Steve and Edie's indifference curves will not intersect.
V) Steve's indifference curves will be downward sloping and Edie's will be
upward sloping.

A. I and
V
B. I and
III
C. III and
IV
D. I and
II
E. II and
IV

[Link] capital allocation line can be described as the

A. investment opportunity set formed with a risky asset and a risk-

free asset.
B. investment opportunity set formed with two
risky assets.
C. line on which lie all portfolios that offer the same utility to a
particular investor.
D. line on which lie all portfolios with the same expected rate of return and
different standard deviations.

[Link] of the following statements regarding the capital allocation line (CAL) is
false?

A. The CAL shows risk-return

combinations.
B. The slope of the CAL equals the increase in the expected return of the
complete portfolio per unit of additional standard deviation.
C. The slope of the CAL is also called the reward-to-
volatility ratio.
D. The CAL is also called the efficient frontier of risky assets in the absence of a
risk-free asset.
[Link] the capital allocation line, an investor's optimal portfolio is the portfolio
that

A. maximizes her expected

profit.
B. maximizes her
risk.
C. minimizes both her risk and
return.
D. maximizes her expected
utility.
E. None of the
options

[Link] investor invests 30% of his wealth in a risky asset with an expected rate of
return of 0.15 and a variance of 0.04 and 70% in a T-bill that pays 6%. His
portfolio's expected return and standard deviation are __________ and
__________, respectively.

A. 0.114;
0.12
B. 0.087;
0.06
C. 0.295;
0.06
D. 0.087;
0.12
E. None of the
options

[Link] investor invests 30% of his wealth in a risky asset with an expected rate of
return of 0.13 and a variance of 0.03 and 70% in a T-bill that pays 6%. His
portfolio's expected return and standard deviation are __________ and
__________, respectively.

A. 0.114;
0.128
B. 0.087;
0.063
C. 0.295;
0.125
D. 0.081;
0.052
[Link] investor invests 40% of his wealth in a risky asset with an expected rate of
return of 0.17 and a variance of 0.08 and 60% in a T-bill that pays 4.5%. His
portfolio's expected return and standard deviation are __________ and
__________, respectively.

A. 0.114;
0.126
B. 0.087;
0.068
C. 0.095;
0.113
D. 0.087;
0.124
E. None of the
options

[Link] investor invests 70% of his wealth in a risky asset with an expected rate of
return of 0.15 and a variance of 0.04 and 30% in a T-bill that pays 5%. His
portfolio's expected return and standard deviation are __________ and
__________, respectively.

A. 0.120;
0.14
B. 0.087;
0.06
C. 0.295;
0.12
D. 0.087;
0.12
[Link] invest $100 in a risky asset with an expected rate of return of 0.12 and a
standard deviation of 0.15 and a T-bill with a rate of return of 0.05.

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
0.09?

A. 85% and
15%
B. 75% and
25%
C. 67% and
33%
D. 57% and
43%
E. Cannot be
determined

[Link] invest $100 in a risky asset with an expected rate of return of 0.12 and a
standard deviation of 0.15 and a T-bill with a rate of return of 0.05.

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
0.06?

A. 30% and
70%
B. 50% and
50%
C. 60% and
40%
D. 40% and
60%
E. Cannot be
determined
[Link] invest $100 in a risky asset with an expected rate of return of 0.12 and a
standard deviation of 0.15 and a T-bill with a rate of return of 0.05.

A portfolio that has an expected outcome of $115 is formed by

A. investing $100 in the risky

asset.
B. investing $80 in the risky asset and $20 in the risk-
free asset.
C. borrowing $43 at the risk-free rate and investing the total amount ($143) in
the risky asset.
D. investing $43 in the risky asset and $57 in the
riskless asset.
E. Such a portfolio cannot be
formed.

[Link] invest $100 in a risky asset with an expected rate of return of 0.12 and a
standard deviation of 0.15 and a T-bill with a rate of return of 0.05.

The slope of the capital allocation line formed with the risky asset and the risk-
free asset is equal to

A. 0.466
7.
B. 0.800
0.
C. 2.14
.
D. 0.4166
7.
E. Cannot be
determined
[Link] a T-bill with a rate of return of 5% and the following risky securities:

Security A: E(r) = 0.15; Variance = 0.04

Security B: E(r) = 0.10; Variance = 0.0225
Security C: E(r) = 0.12; Variance = 0.01
Security D: E(r) = 0.13; Variance = 0.0625

From which set of portfolios, formed with the T-bill and any one of the four
risky securities, would a risk-averse investor always choose his portfolio?

A. The set of portfolios formed with the T-bill and

security A.
B. The set of portfolios formed with the T-bill and
security B.
C. The set of portfolios formed with the T-bill and
security C.
D. The set of portfolios formed with the T-bill and
security D.
E. Cannot be
determined

[Link] are considering investing $1,000 in a T-bill that pays 0.05 and a risky
portfolio, P, constructed with two risky securities, X and Y. The weights of X
and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of
0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a
variance of 0.0081.

If you want to form a portfolio with an expected rate of return of 0.11, what
percentages of your money must you invest in the T-bill and P, respectively?

A. 0.25;
0.75
B. 0.19;
0.81
C. 0.65;
0.35
D. 0.50;
0.50
E. Cannot be
determined
[Link] are considering investing $1,000 in a T-bill that pays 0.05 and a risky
portfolio, P, constructed with two risky securities, X and Y. The weights of X
and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of
0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a
variance of 0.0081.

If you want to form a portfolio with an expected rate of return of 0.10, what
percentages of your money must you invest in the T-bill, X, and Y,
respectively, if you keep X and Y in the same proportions to each other as in
portfolio P?

A. 0.25; 0.45;
0.30
B. 0.19; 0.49;
0.32
C. 0.32; 0.41;
0.27
D. 0.50; 0.30;
0.20
E. Cannot be
determined

[Link] are considering investing $1,000 in a T-bill that pays 0.05 and a risky
portfolio, P, constructed with two risky securities, X and Y. The weights of X
and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of
0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a
variance of 0.0081.

What would be the dollar values of your positions in X and Y, respectively, if

you decide to hold 40% of your money in the risky portfolio and 60% in T-
bills?

A. $240;
$360
B. $360;
$240
C. $100;
$240
D. $240;
$160
E. Cannot be
determined
[Link] are considering investing $1,000 in a T-bill that pays 0.05 and a risky
portfolio, P, constructed with two risky securities, X and Y. The weights of X
and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of
0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a
variance of 0.0081.

What would be the dollar value of your positions in X, Y, and the T-bills,
respectively, if you decide to hold a portfolio that has an expected outcome of
$1,120?

A. Cannot be
determined
B. $568; $378;
$54
C. $568; $54;
$378
D. $378; $54;
$568
E. $108; $514;
$378

41.A reward-to-volatility ratio is useful in

A. measuring the standard deviation of

returns.
B. understanding how returns increase relative to risk
increases.
C. analyzing returns on variable rate
bonds.
D. assessing the effects of
inflation.
E. None of the
options

[Link] change from a straight to a kinked capital allocation line is a result of

A. reward-to-volatility ratio
increasing.
B. borrowing rate exceeding lending
rate.
C. an investor's risk tolerance
decreasing.
D. increase in the portfolio proportion of the risk-
free asset.
[Link] first major step in asset allocation is

A. assessing risk
tolerance.
B. analyzing financial
statements.
C. estimating security
betas.
D. identifying market
anomalies.

[Link] on their relative degrees of risk tolerance

A. investors will hold varying amounts of the risky asset in their

portfolios.
B. all investors will have the same portfolio asset
allocations.
C. investors will hold varying amounts of the risk-free asset in their
portfolios.
D. investors will hold varying amounts of the risky asset and varying amounts
of the risk-free asset in their portfolios.

[Link] allocation may involve

A. the decision as to the allocation between a risk-free asset and a

risky asset.
B. the decision as to the allocation among different
risky assets.
C. considerable security
analysis.
D. the decision as to the allocation between a risk-free asset and a risky asset
and the decision as to the allocation among different risky assets.
E. the decision as to the allocation between a risk-free asset and a risky asset
and considerable security analysis.
[Link] the mean-standard deviation graph, the line that connects the risk-free rate
and the optimal risky portfolio, P, is called

A. the security market

line.
B. the capital allocation
line.
C. the indifference
curve.
D. the investor's utility
line.

[Link] bills are commonly viewed as risk-free assets because

A. their short-term nature makes their values insensitive to interest rate

fluctuations.
B. the inflation uncertainty over their time to maturity is
negligible.
C. their term to maturity is identical to most investors' desired
holding periods.
D. their short-term nature makes their values insensitive to interest rate
fluctuations and the inflation uncertainty over their time to maturity is
negligible.
E. the inflation uncertainty over their time to maturity is negligible and their
term to maturity is identical to most investors' desired holding periods.
[Link] client, Bo Regard, holds a complete portfolio that consists of a portfolio of
risky assets (P) and T-Bills. The information below refers to these assets.

What is the expected return on Bo's complete portfolio?

A. 10.32
%
B. 5.28
%
C. 9.62
%
D. 8.44
%
E. 7.58
%
[Link] client, Bo Regard, holds a complete portfolio that consists of a portfolio of
risky assets (P) and T-Bills. The information below refers to these assets.

What is the standard deviation of Bo's complete portfolio?

A. 7.20
%
B. 5.40
%
C. 6.92
%
D. 4.98
%
E. 5.76
%
[Link] client, Bo Regard, holds a complete portfolio that consists of a portfolio of
risky assets (P) and T-Bills. The information below refers to these assets.

What is the equation of Bo's capital allocation line?

A. E(rC) = 7.2 + 3.6 × Standard

Deviation of C
B. E(rC) = 3.6 + 1.167 × Standard
Deviation of C
C. E(rC) = 3.6 + 12.0 × Standard
Deviation of C
D. E(rC) = 0.2 + 1.167 × Standard
Deviation of C
E. E(rC) = 3.6 + 0.857 × Standard
Deviation of C
[Link] client, Bo Regard, holds a complete portfolio that consists of a portfolio of
risky assets (P) and T-Bills. The information below refers to these assets.

What are the proportions of stocks A, B, and C, respectively, in Bo's complete

portfolio?

A. 40%, 25%,
35%
B. 8%, 5%,
7%
C. 32%, 20%,
28%
D. 16%, 10%,
14%
E. 20%, 12.5%,
17.5%

[Link] build an indifference curve we can first find the utility of a portfolio with
100% in the risk-free asset, then

A. find the utility of a portfolio with 0% in the risk-

free asset.
B. change the expected return of the portfolio and equate the utility to the
standard deviation.
C. find another utility level with
0% risk.
D. change the standard deviation of the portfolio and find the expected return
the investor would require to maintain the same utility level.
E. change the risk-free rate and find the utility level that results in the same
standard deviation.