1. The slope of the capital allocation line is called the _____.

capital allocation ratio

variability-to-reward ratio

Sharpe ratio

capital allocation slope

2. An investor wants to invest money in Treasury bills and a risky fund managed by Infinity Capital. The investor wants to achieve an expected return of 10% on his complete portfolio. Infinity Capital has an expected return of 9% and a standard deviation of returns of 14%. T-bills have a return of 3%.

a. What proportion of his total investment should he invest in the T-bills in order to achieve the expected return?

b. What is the standard deviation of the complete portfolio?

3. The risk premium is _____.

Check all that apply:

the reward for bearing risk

the difference between the expected rate of return on an asset and the risk-free rate

normally zero for risky assets

normally positive for risky assets

4. You predict the following expected returns for a stock and Treasury bills:

Year	Stock	T-bills
2021	12%	5%
2020	8%	5%
2019	15%	2%

a. What is the risk premium for the stock in 2021?

b. What is the (arithmetic) average expected return for the stock?

c. What was the (arithmetic) average expected return for T-bills?

d. What is the average risk premium?

5. Below are the expected returns for different asset classes for next year:

Asset class	Exp. return
T-bills	2.8%
Corporate bonds	6.8%
Small company stocks	17.9%
Large company stocks	8.4%

a. What is the risk premium for corporate bonds?

b. What is the risk premium for small company stocks?

c. What is the risk premium for large company stocks?