ES&M EXAM 3

variance

Which of the following statistics cannot be negative?

average return

Which one of the following stock return statistics fluctuates the most over time?

optimal mix of the risk-free asset and risky asset

An investor's degree of risk aversion will determine his or her ______.

asset A

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

requires a risk premium to take on the risk

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

capital allocation line

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________.

II only

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a risk premium equal to security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

the returns on the stock and bond portfolios tend to vary independently of each other

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

highest; steepest

The _________ reward-to-variability ratio is found on the ________ capital allocation line.

the risk-free asset and the risky portfolio combined

The complete portfolio refers to the investment in _________.

their covariance divided by the product of their standard deviations

The correlation coefficient between two assets equals _________.

rate of return in excess of the Treasury-bill rate

The excess return is the _________.

the weighted sum of the securities' expected returns

The expected rate of return of a portfolio of risky securities is _________.

the slope of the capital allocation line

The reward-to-volatility ratio is given by _________.

the risk-free asset combined with at least one risky asset

The term complete portfolio refers to a portfolio consisting of _________________.

neither asset A nor asset B is acceptable

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: Asset A E(rA) = 10% σA = 20% Asset B E(rB) = 15% σB = 27% An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis.