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