1. 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.

A. 0.114; 0.12

B. 0.087; 0.06

C. 0.295; 0.12

D. 0.087; 0.12

E. none of the above

2. In 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

E. none of the above

3. If a portfolio had a return of 15%, the risk free asset return was 5%, and the standard deviation of the portfolio's excess returns was 30%, the Sharpe measure would be _____.

A. 0.20

B. 0.35

C. 0.45

D. 0.33

E. 0.25

4. You have been given this probability distribution for the holding period return for KMP stock: What is the expected standard deviation for KMP stock?

state of the economy	Probability	HPR
Boom	.30	18%
Normal growth	.50	12%
Recession	.20	-5%

A. 6.91%

B. 8.13%

C. 7.79%

D. 7.25%

E. 8.85%

5. Which one of the following portfolios cannot lie on the efficient frontier as described by Markowitz?

Portfolio	Expeted return	Standard deviation
A	10%	12%
B	5%	7%
C	15%	20%
D	12%	25%

A. Only portfolio A cannot lie on the efficient frontier.

B. Only portfolio B cannot lie on the efficient frontier.

C. Only portfolio C cannot lie on the efficient frontier.

D. Only portfolio D cannot lie on the efficient frontier.

E. Cannot tell from the information given.

6. Other things equal, diversification is most effective when

A. securities' returns are uncorrelated.

B. securities' returns are positively correlated.

C. securities' returns are high.

D. securities' returns are negatively correlated.

E. B and C.

7. As diversification increases, the standard deviation of a portfolio approaches ____________.

A. 0

B. 1

C. infinity

D. the standard deviation of the market portfolio

8. The efficient frontier of risky assets is

A. the portion of the investment opportunity set that lies above the global minimum variance portfolio.

B. the portion of the investment opportunity set that represents the highest standard deviations.

C. the portion of the investment opportunity set which includes the portfolios with the lowest standard deviation.

D. the set of portfolios that have zero standard deviation.

E. both A and B are true.