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Multiple Choice Quiz
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1

Given the capital allocation line, an investor's optimal portfolio is the portfolio that
A)maximizes her expected utility.
B)maximizes her risk.
C)minimizes both her risk and return.
D)maximizes her expected profit.
E)none of the above
2

A reward-to-volatility ratio is useful in
A)measuring the standard deviation of returns.
B)analyzing returns on variable rate bonds.
C)understanding how returns increase relative to risk increases.
D)assessing the effects of inflation.
E)none of the above
3

The change from a straight to a kinked capital allocation line is a result of
A)borrowing rate exceeding lending rate.
B)reward-to-volatility ratio increasing.
C)an investor's risk tolerance decreasing.
D)increase in the portfolio proportion of the risk-free asset.
E)none of the above
4

Based on their relative degrees of risk tolerance
A)investors will hold varying amounts of the risky asset in their portfolios.
B)investors will hold varying amounts of the risk-free asset in their portfolios.
C)all investors will have the same portfolio asset allocations.
D)A and B.
E)A and C.
5

The first major step in asset allocation is
A)estimating security betas.
B)analyzing financial statements.
C)assessing risk tolerance.
D)identifying market anomalies.
E)none of the above
6

Passive investing
A)involves considerable security selection.
B)may be accomplished by investing in index mutual funds.
C)involves considerable transaction costs.
D)A and B.
E)none of the above
7

In the mean-standard deviation graph, the line that connects the optimal risky portfolio, P, and the risk free rate is called
A)the Security Market Line.
B)the Investor's Utility Line.
C)the Indifference Curve.
D)the Capital Allocation Line.
E)none of the above
8

When a portfolio consists of only a risky asset and a risk-free asset, increasing the fraction of the overall portfolio invested in the risky asset will
A)increase the expected return on the portfolio.
B)increase the standard deviation of the portfolio.
C)change the risk-reward ratio.
D)neither A, B nor C are true.
E)A and B are true.
9

When wealth is shifted from the risky portfolio to the risk-free asset, what happens to the relative proportions of the various risky assets within the risky portfolio?
A)They are not changed.
B)Some increase and some decrease.
C)They all increase.
D)They all decrease.
E)The answer depends on the specific circumstances.
10

An investor invests 60 percent of his wealth in a risky asset with an expected rate of return of 0.14 and a variance of 0.32 and 40 percent in a T-bill that pays 3 percent. His portfolio's expected return and standard deviation are __________ and __________, respectively.
A)0.096; 0.339
B)0.087; 0.267
C)0.295; 0.123
D)0.087; 0.182
E)none of the above





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