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

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 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

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

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

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

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

If a risk-free asset is part of the investment opportunity set, then the efficient frontier is a:

A) curve called the minimum-variance frontier.

B) curve called the efficient portfolio set.

C) straight line called the capital allocation line (CAL).

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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), whether or not risky asset correlations are equal to one. The y-intercept of the CAL is the risk-free rate. The CAL is tangent to the minimum-variance frontier of risky assets.

luckygiftvn

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

A) minimum variance line.

B) capital market line.

C) security market line.

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The capital market line is the capital allocation line with the market portfolio as the tangency portfolio.