Question 20 (1)

Referring to the Capital Market Line (CML) which of the following strategies has the highest expected return and the highest risk for the investor?

		Invest all of her or his funds in Rm
		Invest in a portfolio of 50% in Rf and 50% in Rm
		Invest 75% in Rm and 25% in Rf
		Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rf
		Invest all his or her funds in the riskless asset
		Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rm

Question 21 (1)

Given the following information calculate the standard deviation of returns of a portfolio that combines government bonds with the market portfolio.

Rm = .11

Rf = .05

Standard Deviation of market return = 0.11

Enter your answer as a decimal accurate to three decimal places.

Proportion invested in Rm = 0.5

Question 22 (1)

With respect to the graph provided above (PBEHP 12^th Ed, page 184) which of the following statements is incorrect.

A risk-averse investor would prefer combinations on the hard red line represented by ?1,2 = -1.0, Risk-averse investors would never hold combinations of the two securities represented by pointson the on the dotted lines

The degree of risk reduction increases as the correlation between returns on the two securities Question 23 (1) The portfolios represented by the points on the line through Rf and M dominate the portfolios represented by the line Rf through T The lowest risk portfolio is a portfolio of 100% in government bonds, at point Rf For investors the levered (borrowing) portfolios from M up to N provide higher returns The lines U1, U2, and U3 represent the utility function of three different investors, U1

represents a risk averse investor, U2 represents a risk neutral investor and U3 is a risk seeker

To reach a point on the line Rf through to N, that is above M the weight or proportion of

Rf must be negative

Question 20 (1)

Referring tothe Capital Market Line (CML) which of the following strategies has the highestexpected return and the highest risk for the investor?

		o Invest all of her or his funds in Rm
		o Invest in a portfolio of 50% in Rf and 50% in Rm
		o Invest 75% in Rm and 25% in Rf
		o Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rf
		o Invest all his or her funds in the riskless asset
		o Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rm

Question 21 (1)

Given thefollowing information calculate the standard deviation of returns of aportfolio that combines government bonds with the market portfolio.

Rm = .11

Rf = .05

StandardDeviation of market return = 0.11

Enter youranswer as a decimal accurate to three decimal places.

Proportioninvested in Rm = 0.5

Question 22 (1)

With respect tothe graph provided above (PBEHP 12^th Ed, page 184) which of thefollowing statements is incorrect.

o A risk-averse investor would prefer combinations on the hard red line represented by ?1,2 = -1.0,

as opposed to all of the other feasible combinations below this line

o When the correlation coefficient is -1, risk can be eliminated completely

o Risk-averse investors would never hold combinations of the two securities represented by points

on the on the dotted lines

o The degree of risk reduction increases as the correlation between returns on the two securities

decreases coefficient

o A risk-averse investor does not like risk and so would prefer to invest in the portfolio represented

by the point where the expected return is .096 and the standard deviation is zero, because this

portfolio has zero risk

o Question 23 (1)

With respect to the graph above (PBEHP, 12 Ed, page 191).

Which of the following statements is incorrect?

o	o	o The portfolios represented by the points on the line through Rf and M dominate the portfolios represented by the line Rf through T
o	o	o The lowest risk portfolio is a portfolio of 100% in government bonds, at point Rf
o	o	o For investors the levered (borrowing) portfolios from M up to N providehigher returns than the portfolios from Rf to M.
o	o	o The lines U1, U2, and U3 represent the utility function of three different investors, U1 represents a risk averse investor, U2 represents a risk neutral investor and U3 is a risk seeker
o	o	o To reach a point on the line Rf through to N, that is above M the weight or proportion of Rf must be negative

Question 20 (1)

Referring to the Capital Market Line (CML) which of the following strategies has the highest expected return and the highest risk for the investor?

		Invest all of her or his funds in Rm
		Invest in a portfolio of 50% in Rf and 50% in Rm
		Invest 75% in Rm and 25% in Rf
		Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rf
		Invest all his or her funds in the riskless asset
		Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rm

Question 21 (1)

Given the following information calculate the standard deviation of returns of a portfolio that combines government bonds with the market portfolio.

Rm = .11

Rf = .05

Standard Deviation of market return = 0.11

Enter your answer as a decimal accurate to three decimal places.

Proportion invested in Rm = 0.5

Question 22 (1)

With respect to the graph provided above (PBEHP 12^th Ed, page 184) which of the following statements is incorrect.

A risk-averse investor would prefer combinations on the hard red line represented by ?1,2 = -1.0, Risk-averse investors would never hold combinations of the two securities represented by points

on the on the dotted lines

The degree of risk reduction increases as the correlation between returns on the two securities Question 23 (1) The portfolios represented by the points on the line through Rf and M dominate the

portfolios represented by the line Rf through T

The lowest risk portfolio is a portfolio of 100% in government bonds, at point Rf For investors the levered (borrowing) portfolios from M up to N provide higher returns

The lines U1, U2, and U3 represent the utility function of three different investors, U1

represents a risk averse investor, U2 represents a risk neutral investor and U3 is a risk seeker

To reach a point on the line Rf through to N, that is above M the weight or proportion of

Rf must be negative

Question 20 (1)

Referring tothe Capital Market Line (CML) which of the following strategies has the highestexpected return and the highest risk for the investor?

		o Invest all of her or his funds in Rm
		o Invest in a portfolio of 50% in Rf and 50% in Rm
		o Invest 75% in Rm and 25% in Rf
		o Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rf
		o Invest all his or her funds in the riskless asset
		o Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rm

Question 21 (1)

Given thefollowing information calculate the standard deviation of returns of aportfolio that combines government bonds with the market portfolio.

Rm = .11

Rf = .05

StandardDeviation of market return = 0.11

Enter youranswer as a decimal accurate to three decimal places.

Proportioninvested in Rm = 0.5

Question 22 (1)

With respect tothe graph provided above (PBEHP 12^th Ed, page 184) which of thefollowing statements is incorrect.

o A risk-averse investor would prefer combinations on the hard red line represented by ?1,2 = -1.0,

as opposed to all of the other feasible combinations below this line

o When the correlation coefficient is -1, risk can be eliminated completely

o Risk-averse investors would never hold combinations of the two securities represented by points

on the on the dotted lines

o The degree of risk reduction increases as the correlation between returns on the two securities

decreases coefficient

o A risk-averse investor does not like risk and so would prefer to invest in the portfolio represented

by the point where the expected return is .096 and the standard deviation is zero, because this

portfolio has zero risk

o Question 23 (1)

With respect to the graph above (PBEHP, 12 Ed, page 191).

Which of the following statements is incorrect?

o	o	o The portfolios represented by the points on the line through Rf and M dominate the portfolios represented by the line Rf through T
o	o	o The lowest risk portfolio is a portfolio of 100% in government bonds, at point Rf
o	o	o For investors the levered (borrowing) portfolios from M up to N providehigher returns than the portfolios from Rf to M.
o	o	o The lines U1, U2, and U3 represent the utility function of three different investors, U1 represents a risk averse investor, U2 represents a risk neutral investor and U3 is a risk seeker
o	o	o To reach a point on the line Rf through to N, that is above M the weight or proportion of Rf must be negative

Question 20 (1) Referring to the Capital Market Line (CML) which of the following strategies has the highest expected return and the highest risk for the investor? o o o o o o Invest all of her or his funds in Rm Invest in a portfolio of 50% in Rf and 50% in Rm Invest 75% in Rm and 25% in Rf Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rf Invest all his or her funds in the riskless asset Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rm Question 21 (1) Given the following information calculate the standard deviation of returns of a portfolio that combines government bonds with the market portfolio. Rm = .11 Rf = .05 Standard Deviation of market return = 0.11 Enter your answer as a decimal accurate to three decimal places. Proportion invested in Rm = 0.5 Question 22 (1) With respect to the graph provided above (PBEHP 12 th Ed, page 184) which of the following statements is incorrect. o A risk-averse investor would prefer combinations on the hard red line represented by 1,2 = -1.0, as opposed to all of the other feasible combinations below this line o When the correlation coefficient is -1, risk can be eliminated completely o Risk-averse investors would never hold combinations of the two securities represented by points on the on the dotted lines o The degree of risk reduction increases as the correlation between returns on the two securities decreases coefficient o A risk-averse investor does not like risk and so would prefer to invest in the portfolio represented by the point where the expected return is .096 and the standard deviation is zero, because this portfolio has zero risk o Question 23 (1) With respect to the graph above (PBEHP, 12 Ed, page 191). Which of the following statements is incorrect? oo o The portfolios represented by the points on the line through Rf and M dominate the portfolios represented by the line Rf through T oo o The lowest risk portfolio is a portfolio of 100% in government bonds, at point Rf oo o For investors the levered (borrowing) portfolios from M up to N provide higher returns than the portfolios from Rf to M. oo o The lines U1, U2, and U3 represent the utility function of three different investors, U1 represents a risk averse investor, U2 represents a risk neutral investor and U3 is a risk seeker oo o o To reach a point on the line Rf through to N, that is above M the weight or proportion of Rf must be negative