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A line that represents the possible portfolios that combine a risky asset and a risk free asset is most accurately described as a:
A)
characteristic line.
B)
capital allocation line.
C)
capital market line.



The line that represents possible combinations of a risky asset and the risk-free asset is referred to as a capital allocation line (CAL). The capital market line (CML) represents possible combinations of the market portfolio with the risk-free asset. A characteristic line is the best fitting linear relationship between excess returns on an asset and excess returns on the market and is used to estimate an asset's beta.

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The particular portfolio on the efficient frontier that best suits an individual investor is determined by:
A)
the current market risk-free rate as compared to the current market return rate.
B)
the individual's asset allocation plan.
C)
the individual's utility curve.


The optimal portfolio for each investor is the highest indifference curve that is tangent to the efficient frontier.
The optimal portfolio is the portfolio that gives the investor the greatest possible utility.

TOP

Investors who are less risk averse will have what type of utility curves?
A)
Flatter.
B)
Inverted.
C)
Steeper.



Investors who are less risk averse will have flat utility curves, meaning they are willing to take on more risk for a slightly higher return. Investors who are more risk averse require a much higher return to accept more risk, producing a steep utility curve.

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The graph below combines the efficient frontier with the indifference curves for two different investors, X and Y.
Which of the following statements about the above graph is least accurate?
A)
The efficient frontier line represents the portfolios that provide the highest return at each risk level.
B)
Investor X's expected return will always be less than that of Investor Y.
C)
Investor X is less risk-averse than Investor Y.



Investor X has a steep indifference curve, indicating that he is risk-averse. Flatter indifference curves, such as those for Investor Y, indicate a less risk-averse investor. The other choices are true. A more risk-averse investor will likely obtain lower returns than a less risk-averse investor.

TOP

According to Markowitz, an investor’s optimal portfolio is determined where the:
A)
investor's highest utility curve is tangent to the efficient frontier.
B)
investor's lowest utility curve is tangent to the efficient frontier.
C)
investor's utility curve meets the efficient frontier.



The optimal portfolio for an investor is determined as the point where the investor’s highest utility curve is tangent to the efficient frontier.

TOP

The optimal portfolio in the Markowitz framework occurs when an investor achieves the diversified portfolio with the:
A)
highest return.
B)
highest utility.
C)
lowest risk.



The optimal portfolio in the Markowitz framework occurs when the investor achieves the diversified portfolio with the highest utility.

TOP

Which of the following statements about the optimal portfolio is NOT correct? The optimal portfolio:
A)
is the portfolio that gives the investor the maximum level of return.
B)
lies at the point of tangency between the efficient frontier and the indifference curve with the highest possible utility.
C)
may be different for different investors.


This statement is incorrect because it does not specify that risk must also be considered.

TOP

Which of the following statements about the efficient frontier is least accurate?
A)
Portfolios falling on the efficient frontier are fully diversified.
B)
Investors will want to invest in the portfolio on the efficient frontier that offers the highest rate of return.
C)
The efficient frontier shows the relationship that exists between expected return and total risk in the absence of a risk-free asset.



The optimal portfolio for each investor is the highest indifference curve that is tangent to the efficient frontier.

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