luckygiftvn

Which of the following does NOT describe the capital allocation line (CAL)?

A) The CAL is tangent to the minimum-variance frontier.

B) It is the efficient frontier when a risk-free asset is available.

C) It runs through the global minimum-variance portfolio.

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If a risk-free investment is part of the investment opportunity set, then the efficient frontier is a straight line called the capital allocation line (CAL). The CAL is tangent to the minimum-variance frontier of risky assets; therefore, it cannot run through the global minimum-variance portfolio.

luckygiftvn

The equation of the capital market line (CML) says that the expected return on any portfolio equals the:

A) risk-free rate plus the product of the market risk premium and the market's portfolio standard deviation.

B) risk-free rate plus the product of the market price of risk and the portfolio's standard deviation.

C) risk-free rate plus the product of the market price of risk and the market's portfolio standard deviation.

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The CML is the capital allocation line with the market portfolio as the tangency portfolio. The equation of the CML is:

E(RP) = RF + [(E(RM) – RF)/sM] sp
where:
E(RM) = the expected return on the market portfolio, M
sM = the standard deviation of the market portfolio, M
RF = the risk-free return

The intercept is the risk-free rate, RF. The slope is equal to [(E(RT) – RF) / sT], where [E(RT) – RF] is the expected risk premium on the tangency portfolio.

luckygiftvn

The capital market line (CML) is the capital allocation line with the:

A) global minimum-variance portfolio as the tangency portfolio.

B) market portfolio as the tangency portfolio.

C) market portfolio as the global minimum-variance portfolio.

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The CML is the capital allocation line (CAL) with the market portfolio as the tangency portfolio.

luckygiftvn

Which of the following statements regarding the capital market line (CML) is least accurate? The CML:

A) implies that all portfolios on the CML are perfectly positively correlated.

B) slope is equal to the expected return of the market portfolio minus the risk-free rate.

C) dominates everything below the line on the original efficient frontier.

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The slope of the CML = (the expected return of the market − the risk-free rate) / (the standard deviation of returns on the market portfolio)
Because the CML is a straight line, it implies that all the portfolios on the CML are perfectly positively correlated.

luckygiftvn

Which of the following statements regarding the capital market line (CML) is least accurate? The CML:

A) implies that all portfolios on the CML are perfectly positively correlated.

B) slope is equal to the expected return of the market portfolio minus the risk-free rate.

C) dominates everything below the line on the original efficient frontier.

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The slope of the CML = (the expected return of the market − the risk-free rate) / (the standard deviation of returns on the market portfolio)
Because the CML is a straight line, it implies that all the portfolios on the CML are perfectly positively correlated.

luckygiftvn

Consider an equally-weighted portfolio comprised of 17 assets in which the average asset standard deviation equals 0.69 and the average covariance equals 0.36. What is the variance of the portfolio?

A) 32.1%.

B) 36.7%.

C) 37.5%.

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Portfolio variance = σ2p = (1 / n) σ 21 + [(n − 1) / n]cov = [(1 / 17) × 0.48] + [(16 / 17) × 0.36] = 0.028 + 0.339 = 0.367 = 36.7%

luckygiftvn

Consider an equally-weighted portfolio comprised of five assets in which the average asset standard deviation equals 0.57 and the average correlation between all asset pairs is −0.21. The variance of the portfolio is closest to:

A) 1.82%.

B) 1.00%.

C) 10.00%.

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Portfolio variance = σ2p = (1 / n) σ 21 + [(n - 1) / n]cov
ρ1,2 = (cov1,2) / (σ1 σ2) therefore cov1,2 = (ρ1,2)(σ1 σ2) = (−0.21)(0.57)(0.57) = −0.068
σ2 = (0.57)2 = 0.32
σ2p = (1 / 5)(0.32) + (4 / 5)(−0.068) = 0.064 + (−0.0544) = 0.0096 or 1.00%

luckygiftvn

Consider an equally-weighted portfolio comprised of seven assets in which the average asset variance equals 0.31 and the average covariance equals 0.27. What is the variance of the portfolio?

A) 24.16%.

B) 27.5%.

C) 27.00%.

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Portfolio variance = σ2p = (1 / n) σ 21 + [(n − 1) / n]cov = [(1 / 7) × 0.31] + [(6 / 7) × 0.27] = 0.044 + 0.231 = 0.275 = 27.5%

luckygiftvn

Matton, CFA, has been asked to invest $100,000, choosing one or more of the following three stocks. All stocks have the same expected return and standard deviation. The correlation matrix for the three stocks is given below:

Stock Correlations
	X	Y	Z
X	1.00	0.15	0.70
Y	0.15	1.00	0.51
Z	0.70	0.51	1.00

Which of the three stocks, X, Y, and Z, should be included in the portfolio?

A) X, Y, and Z.

B) Any investment in the three stocks will result in the exact same expected return and risk.

C) X and Y only.

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Diversification benefits occur whenever a stock is added that is not perfectly positively correlated with other stocks in the portfolio. Since none of the stocks are perfectly positively correlated with the other stocks, it would be beneficial to purchase all three rather than just one or two stocks

luckygiftvn

It can be determined from the figure below that ρ2 is:

A) between 0.2 and 1.0.

B) between 0.0 and 0.2.

C) between -1.0 and 0.2.

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The diversification benefits are greater if the correlation between the returns of the assets in the portfolio is lower. If the correlation equals +1, the minimum variance frontier is a straight line and there is no benefit to diversification (ρ3). If the correlation equals = -1, the minimum variance frontier is two line segments (ρ1). Therefore ρ2 must be less than 0.2 and greater than –1.0. It could be equal to zero, but we can’t tell for sure given the information in the problem.