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Week8 - Practice
Week8 - Practice
return an asset is
expected to yield in excess of the risk free rate of return
Week 8 Practice Questions
1. Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor _______.
2. Consider the following two investment alternatives: First, a risky portfolio that pays
a 15% rate of return with a probability of 40% or a 5% rate of return with a
probability of 60%. Second, a Treasury bill that pays 6%. Compute the risk premium
on the risky investment.
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Risk premium E up
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3. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a
risky asset with an expected rate of return of 16% and a standard deviation of 20%
and a Treasury bill with a rate of return of 6%. Compute the slope of the capital
allocation line formed with the risky asset and the risk-free asset.
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162 0.5
20
0
4. You have $500,000 available to invest. The risk-free rate, as well as your borrowing
rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return,
you should _________.
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A. invest $125,000 in the risk-free asset
221 4187 84
B. invest $375,000 in the risk-free asset
2 8
C. borrow $125,000 8
D. borrow $375,000 14 84
8
500,0001 0.75 037541.75
borrowing
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00.75
5. Two assets have the following
risk-free rate is 5%:
1
y
expected returns and standard deviations when the
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An investor with a risk aversion of A = 3 would find that _________________ on a
risk-return basis.
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A. only asset A is acceptable
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B. only asset B is acceptable 0.047 1
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C. neither asset A nor asset B is acceptable
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D. both asset A and asset B are acceptable
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6. You are considering investing $1,000 in a complete portfolio. The complete portfolio
is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with
two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%,
respectively. X has an expected rate of return of 14%, and Y has an expected rate of
return of 10%. To form a complete portfolio with an expected rate of return of 11%,
you should invest __________ of your complete portfolio in Treasury bills.
000
aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation
of 24% only if the risky portfolio's expected return is at least ______.
yet
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A. 8.67%
B. 9.84%
C. 21.28%
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50
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D. 14.68%
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