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| 1 | |
Which of the following statements regarding risk-averse investors is true? |
| | A) | They only accept risky investments that offer risk premiums over the risk-free rate. |
| | B) | They accept investments that are fair games. |
| | C) | They only care about rate of return. |
| | D) | They are willing to accept lower returns and high risk. |
| | E) | A and B |
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| 2 | |
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) | 0.096; 0.123 |
| | D) | 0.087; 0.182 |
| | E) | none of the above |
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| 3 | |
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) | decrease the standard deviation of the portfolio. |
| | D) | A and B are true. |
| | E) | A and C are true. |
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| 4 | |
Olivia is a risk-averse investor. Alex is a less risk-averse investor than Olivia. Therefore, |
| | A) | for the same risk, Alex requires a higher rate of return than Olivia. |
| | B) | for the same return, Alex tolerates higher risk than Olivia. |
| | C) | for the same risk, Olivia requires a lower rate of return than Alex. |
| | D) | for the same return, Olivia tolerates higher risk than Alex. |
| | E) | cannot be determined. |
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| 5 | |
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 |
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| 6 | |
If a T-bill pays 5 percent, which of the following investments would not be chosen by a risk-averse investor? |
| | A) | An asset that pays 10 percent with a probability of 0.60 or 2 percent with a probability of 0.40 |
| | B) | An asset that pays 10 percent with a probability of 0.40 or 2 percent with a probability of 0.60 |
| | C) | An asset that pays 10 percent with a probability of 0.30 or 3.75 percent with a probability of 0.70 |
| | D) | An asset that pays 10 percent with a probability of 0.20 or 3.75 percent with a probability of 0.80 |
| | E) | neither A nor B would be chosen |
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| 7 | |
The exact indifference curves of different investors |
| | A) | can be calculated precisely with the use of advanced calculus. |
| | B) | cannot be known with perfect certainty. |
| | C) | although not known with perfect certainty, do allow the advisor to create more suitable portfolios for the client. |
| | D) | B and C |
| | E) | none of the above |
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| 8 | |
The presence of risk means that |
| | A) | more than one outcome is possible. |
| | B) | investors will lose money. |
| | 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. |
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| 9 | |
The standard deviation of a portfolio that has 40% of its value invested in a risk-free asset and 60% of its value invested in a risky asset with a standard deviation of 30% is |
| | A) | 18%. |
| | B) | 14%. |
| | C) | 21%. |
| | D) | 24%. |
| | E) | 20%. |
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| 10 | |
Consider the following two investment alternatives. First, a risky portfolio that pays a 20 percent rate of return with a probability of 70% or a 7 percent return with a probability of 30%, and second, a T-bill that pays 3 percent. The risk premium on the risky investment is |
| | A) | 12.45%. |
| | B) | 13.1%. |
| | C) | 9.75%. |
| | D) | 15.6%. |
| | E) | none of the above |
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