Investments Exam UPDATED Exam
Questions and CORRECT Answers
An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of
0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent. His portfolio's
expected return and standard deviation are __________ and __________, respectively. -
Correct Answer- 0.087; 0.06
Based on the utility function, which investment would you select among the following 4
assets? U = E(r) - (A/2)s2, where A = 4.0. Expected return is Er and standard deviation is s.
Asset 1 has expected return of 0.12 and standard deviation of 0.2. Asset 2 has expected return
of 0.15 and standard deviation of 0.5. Asset 3 has expected return of 0.21 and standard
deviation of 0.16. Asset 4 has expected return of 0.24 and standard deviation of 0.21. -
Correct Answer- 3
Does the rate of the certificate of deposit vary over time? - Correct Answer- yes because
sometimes there are uncertainties such as 2008 financial crisis.
Steve 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. -
Correct Answer- 1 & 3
The Capital Allocation Line can be described as the - Correct Answer- investment
opportunity set formed with a risky asset and a risk-free asset.
The Capital Market Line
I) is a special case of the Capital Allocation Line.
II) represents the opportunity set of a passive investment strategy.
III) has the one-month T-Bill rate as its intercept.
, IV) uses a broad index of common stocks as its risky portfolio. - Correct Answer- I, II, III,
and IV
The change from a straight to a kinked capital allocation line is a result of: - Correct Answer-
borrowing rate exceeding lending rate
The rate of Baa rated bond, when comparing to AAA rated bond is - Correct Answer- higher
because it has higher default risk
The ten-year Treasury bond rate, when comparing to three-month T-bill rate, is - Correct
Answer- usually higher because of longer time involved but it can be lower when investor
think recessions are coming.
The variable (A) in the utility function represents the - Correct Answer- investors aversion to
risk
Three month T-bill rate is - Correct Answer- Pro-cyclical
Treasury bills are commonly viewed as risk-free assets because - Correct Answer- both their
short-term nature makes their values insensitive to interest rate fluctuations and the inflation
uncertainty over their time to maturity is negligible.
You invest $1000 in a risky asset with an expected rate of return of 0.17 and a standard
deviation of 0.40 and a T-bill with a rate of return of 0.04. 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 0.20? - Correct Answer- 50% & 50%
Which investment would you select if you were risk neutral? U = E(r) - (A/2)s2. Expected
return is Er and standard deviation is s. Asset 1 has expected return of 0.12 and standard
deviation of 0.2. Asset 2 has expected return of 0.15 and standard deviation of 0.5. Asset 3
has expected return of 0.21 and standard deviation of 0.16. Asset 4 has expected return of
0.24 and standard deviation of 0.21. - Correct Answer- 4
Which of the following statements regarding the Capital Allocation Line (CAL) is false? -
Correct Answer- The CAL is also called the efficient frontier of risky assets in the absence of
a risk-free asset.
Questions and CORRECT Answers
An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of
0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent. His portfolio's
expected return and standard deviation are __________ and __________, respectively. -
Correct Answer- 0.087; 0.06
Based on the utility function, which investment would you select among the following 4
assets? U = E(r) - (A/2)s2, where A = 4.0. Expected return is Er and standard deviation is s.
Asset 1 has expected return of 0.12 and standard deviation of 0.2. Asset 2 has expected return
of 0.15 and standard deviation of 0.5. Asset 3 has expected return of 0.21 and standard
deviation of 0.16. Asset 4 has expected return of 0.24 and standard deviation of 0.21. -
Correct Answer- 3
Does the rate of the certificate of deposit vary over time? - Correct Answer- yes because
sometimes there are uncertainties such as 2008 financial crisis.
Steve 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. -
Correct Answer- 1 & 3
The Capital Allocation Line can be described as the - Correct Answer- investment
opportunity set formed with a risky asset and a risk-free asset.
The Capital Market Line
I) is a special case of the Capital Allocation Line.
II) represents the opportunity set of a passive investment strategy.
III) has the one-month T-Bill rate as its intercept.
, IV) uses a broad index of common stocks as its risky portfolio. - Correct Answer- I, II, III,
and IV
The change from a straight to a kinked capital allocation line is a result of: - Correct Answer-
borrowing rate exceeding lending rate
The rate of Baa rated bond, when comparing to AAA rated bond is - Correct Answer- higher
because it has higher default risk
The ten-year Treasury bond rate, when comparing to three-month T-bill rate, is - Correct
Answer- usually higher because of longer time involved but it can be lower when investor
think recessions are coming.
The variable (A) in the utility function represents the - Correct Answer- investors aversion to
risk
Three month T-bill rate is - Correct Answer- Pro-cyclical
Treasury bills are commonly viewed as risk-free assets because - Correct Answer- both their
short-term nature makes their values insensitive to interest rate fluctuations and the inflation
uncertainty over their time to maturity is negligible.
You invest $1000 in a risky asset with an expected rate of return of 0.17 and a standard
deviation of 0.40 and a T-bill with a rate of return of 0.04. 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 0.20? - Correct Answer- 50% & 50%
Which investment would you select if you were risk neutral? U = E(r) - (A/2)s2. Expected
return is Er and standard deviation is s. Asset 1 has expected return of 0.12 and standard
deviation of 0.2. Asset 2 has expected return of 0.15 and standard deviation of 0.5. Asset 3
has expected return of 0.21 and standard deviation of 0.16. Asset 4 has expected return of
0.24 and standard deviation of 0.21. - Correct Answer- 4
Which of the following statements regarding the Capital Allocation Line (CAL) is false? -
Correct Answer- The CAL is also called the efficient frontier of risky assets in the absence of
a risk-free asset.
