Chapter 6: Capital Allocation and Risky Assets
According to the mean-variance criterion, which one of the following investments dominates all others?
E(r) = 0.15; Variance = 0.20
The capital allocation line can be described as the
investment opportunity set formed with a risky asset and a risk-free asset.
Based on their relative degrees of risk tolerance,
investors will hold varying amounts of the risky asset and varying amounts of the risk-free asset in their portfolios.
Treasury bills are commonly viewed as risk-free assets because
their short-term nature makes their values insensitive to interest rate fluctuations, and the inflation uncertainty over their time to maturity is negligible.
An investor invests 35% of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 65% in a T-bill that pays 4%. His portfolio's expected return and standard deviation are __________ and __________, respectively.
0.089; 0.111
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045.The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to
0.3095
You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04.The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to
0.325
According to the mean-variance criterion, which of the statements below is correct? Investment E(r) Std dev. A 10% 5% B 21% 11% C 18% 23% D 24% 16%
Investment B dominates investment C.
The first major step in asset allocation is
assessing risk tolerance.
The standard deviation of a two asset portfolio with a correlation coefficient of .35 will be _______________ the weighted average standard deviation of the portfolio.
below