FIN4501 Chapter 5

Suppose a portfolio is expected to earn 15% while you expect the market to return 14%. The standard deviation of your portfolio is 20%. The current risk-free rate is 4%. The Sharpe Ratio for your portfolio is ____________ 0.55 0.50 0.05 0.75

.55

For which of the following investments the Sharpe ratio is not a valid statistic? S&P 500 Index A balanced portfolio of stocks and bonds 100 shares of Google stock A portfolio of Treasuries with different maturities

100 shares of Google stock

The (use the abbreviation) equals the rate at which invested funds actually grows and does not ignore compounding.

EAR

True or false: The risk-free asset has the highest Sharpe ratio of all assets.

False

Which of the following statements is NOT true about risk-free assets when it comes to treasury bonds? The only risk-free asset in real terms would be a price-indexed government bond such as TIPS. The power to tax and to control the money supply lets the government issue default-free treasury bonds. Inflation does not affect the purchasing power of the proceeds from treasury bonds. Money market funds as well as T-bills are the most easily accessible risk-free asset for most investors.

Inflation does not affect the purchasing power of the proceeds from treasury bonds.

The portfolio choice among broad investment classes is known as allocation.

asset

A passive strategy is based on the premise that securities are fairly priced and it avoids the _ involved in undertaking security analysis.

costs

The reward from an investment is call its return.

expected

t/f Since a Treasury Bond is default-free it is, by implication, risk-free as well.

false

The capital allocation line provided by one-month T-bills and a broad index of common stocks is called the capital _ line. A passive strategy using the broad stock market index as the risk portfolio generates an investment opportunity set that is represented by this line.

market

In a normal distribution, the highest probability event occurs near the left tail mean all right tail

mean

What is a particular investor's price of risk that he demands from the complete portfolio in which his entire wealth is invested? variance expected return expected utility risk aversion

risk aversion

The slope of the capital allocation line equals the increase in expected return per unit of additional variance. the increase in expected return per unit of additional standard deviation. the increase in expected return times each unit of additional standard deviation. the increase in expected return times each unit of additional variance.

the increase in expected return per unit of additional standard deviation.

The Sharpe ratio of a portfolio is the portfolio return divided by the standard deviation of the market's excess return the portfolio risk premium divided by the standard deviation of the portfolio's excess return the portfolio's return divided by the standard deviation of the portfolio's excess return the market risk premium divided by the standard deviation of the portfolio's excess return

the portfolio risk premium divided by the standard deviation of the portfolio's excess return

The risk premium of the complete portfolio equals the risk premium of the risky asset times the fraction of the portfolio invested in the risky asset. the total return of the risky asset times the fraction of the portfolio invested in the risky asset. the total return of the risky asset divided by the fraction of the portfolio invested in the risky asset. the risk premium of the risky asset divided by the fraction of the portfolio invested in the risky asset.

the risk premium of the risky asset times the fraction of the portfolio invested in the risky asset.

In scenario analysis, the HPR is calculated by computing: geomentric average return over the considered period weighted-average of returns in all possible outcomes dollar-weighted return arithmetic average return over the considered period

weighted-average of returns in all possible outcomes