12.Using figure 1, Curve A is

a.Optimal Risky Portfolio

b.Optimal Investor Portfolio

c.Indifference Curve

d.Efficient Frontier

e. Inefficient Portfolio

f.Unattainable Portfolio

g.Capital Allocation Line

13.Using figure 1, Line B is

a.Optimal Risky Portfolio

b.Optimal Investor Portfolio

c.Indifference Curve

d.Efficient Frontier

e.Inefficient Portfolio

f.Unattainable Portfolio

g.Capital Allocation Line

14.Using figure 1, Point C is

a.Optimal Risky Portfolio

b.Optimal Investor Portfolio

c.Indifference Curve

d.Efficient Frontier

e.Inefficient Portfolio

f.Unattainable Portfolio

g.Capital Allocation Line

15.Using figure 1, Curve D is

a.Optimal Risky Portfolio

b.Optimal Investor Portfolio

c.Indifference Curve

d.Efficient Frontier

e.Inefficient Portfolio

f.Unattainable Portfolio

g.Capital Allocation Line

16.Using figure 1 Point E is

a.Optimal Risky Portfolio

b.Optimal Investor Portfolio

c.Indifference Curve

d.Efficient Frontier

e.Inefficient Portfolio

f.Unattainable Portfolio

g.Capital Allocation Line

17.Using figure 1, Point F is

a.Optimal Risky Portfolio

b.Optimal Investor Portfolio

c.Indifference Curve

d.Efficient Frontier

e.Inefficient Portfolio

f.Unattainable Portfolio

g.Capital Allocation Line

18.Using figure 1, Point G is

a.Optimal Risky Portfolio

b.Optimal Investor Portfolio

c.Indifference Curve

d.Efficient Frontier

e.Inefficient Portfolio

f.Unattainable Portfolio

g.Capital Allocation Line

19.You have calculated the expected returns and betas for a universe of stocks to consider for investment (see figure 2). Using that data and the resulting Security Market Line (SML), you should:

a.Sell D, E, F

b.Buy A, and F and do nothing with the others

c.Buy D, E, and Fand Sell A, B, C

20.Using Table 1 The Sharpe ratio for manager 1 is closest to

a.1

b..5

c..7

d..25

71 Appendix 1 Case Study James Stephenson, age 55 and single, is a surgeon who has accumulated a substantial investment portfolio without a clear long-term strategy in mind. Two of his patients who work in financial markets comment as follows: James Hrdina: "My investment firm, based on its experience with investors, has standard investment policy statements in five categories. You would be better served to adopt one of these standard policy statements instead of spending time developing a policy based on your individual circumstances." Charles Gionta: "Developing a long-term policy can be unwise given the fluctuations of the market. You want your investment advisor to react continuously to changing conditions and not be limited by a set policy." Stephenson hires a financial advisor, Caroline Coppa. At their initial meeting, Coppa compiles the following notes: Stephenson currently has a $2.0 million portfolio that has a large con centration in small-capitalization US equities. Over the past five years, the portfolio has averaged 20 percent annual total return on investment. Stephenson hopes that, over the long term, his portfolio will continue to earn 20 percent annually. When asked about his risk tolerance, he described it as "average." He was surprised when informed that US small-cap portfolios have experienced extremely high volatility. He does not expect to retire before age 70. His current income is more than sufficient to meet his expenses. Upon retirement, he plans to sell his surgical practice and use the proceeds to purchase an annuity to cover his post-retirement cash flow needs. Both his income and realized capital gains are taxed at a 30 percent rate. No pertinent legal or regulatory issues apply. He has no pension or retirement plan but does have sufficient health insurance for post-retirement needs. Page