Online Quiz Questions for Week 6

Topic: Optimal Portfolios

Question: An investors optimal balanced portfolio is the portfolio that:
Correct Answer:

Maximises his utility

Question: When using EXCEL to locate the optimal balanced portfolio, the
purpose is to:
@When using EXCEL, the objective function is to identify the composition of
the balanced portfolio (the allocation of funds between the ORP and the risk
free asset) that gives rise to the highest utility.
Correct
Answer:

Maximise the utility of the balanced portfolio by changing

the weight allocated to the optimal risky portfolio

Question: Given an optimal risky portfolio with expected return of 14% and
standard deviation of returns of 22% and a risk free rate of 6%, what is the
slope of the best feasible capital allocation line?
Correct Answer:

0.36

Question: Suppose your initial wealth is $1000. The risk free asset makes
up -40% of your optimal balanced portfolio. Telstra makes up 15% of your
optimal risky portfolio. How much do you invest in Telstra?
Selected Answer:

$150

Correct Answer:

$210

Response
Feedback:

Amount invested in your optimal risky portfolio = $1000 x

140% = $1400; Amount invested in Telstra = $1400 x 15%
= $210

Question: Other things being equal, when you combine a risk free asset
with a portfolio of risky assets, the larger the standard deviation of return of
the portfolio of risky assets, the larger the standard deviation of return of
the balanced portfolio.
Selected Answer:
A and B
Correct Answer:
Response
Feedback:

This statement is always true

The standard deviation of returns of the balanced portfolio is

given by B
= yPP because the standard deviation of returns of the risk

free asset and the covariance of returns between the risk free
asset and the portfolio of risky assets are zero.
Question: Which of the following statements regarding the capital
allocation line is false?
Selected
The slope of the capital allocation line is obtained by
Answer:
dividing the expected return of a portfolio of risky assets by the
standard deviation of returns of the portfolio
Correct
Answer:

Both A and C are true

Response The capital allocation line shows the risk return combinations of
Feedback a set of balanced portfolios that combine a risk-free asset with
:
a portfolio of risky assets in different proportions. Its slope is
the reward to variability ratio and measured as the excess
portfolio return per unit of (standard deviation) risk. Thus, both
A and C are true.

Question: The capital allocation line can be described as the:

Correct
Answer:

Investment opportunity set formed with a risky asset and

a risk-free asset

Question: An investor invests 30% of his wealth in a risky asset with an

expected rate of return of 15% and a standard deviation of returns of 20%
and 70% in a T-bill that pays 6%. His portfolios expected return and
standard deviation of returns are ________ and ________, respectively.
Correct Answer:

8.7%; 6%

Question: The separation theorem says:

Selected
Two or more of the above are correct
Answer:
Correct
Answer:

The choice of the optimal risky portfolio is independent of

the investors degree of risk aversion

Response The separation theorem states that in the presence of a risk

Feedback free asset, the decision regarding the choice of portfolios of
:
risky assets is separate and independent of the investors
degree of risk aversion. The degree of risk aversion only affects
the choice of balanced portfolios. The more risk averse you are,
the less you allocate your capital to the optimal risky portfolio.

Question: Which of the following securities would a risk-averse investor

always choose as his risky asset in his balanced portfolio, given that a
Treasury-bill has a rate of return of 5%?
Correct Answer:
Security C: E(r) = 12%; Standard deviation = 10%
Question: Having a kinked capital allocation line can be a result of:
Correct Answer:

The borrowing rate exceeding the lending rate

Question: Which of the following securities would a risk-averse investor

always choose as his risky asset in his balanced portfolio, given that a
Treasury-bill has a rate of return of 5%?
Selected Answer:
Cannot be determined
Correct Answer:
Response
Feedback:

Security C: E(r) = 12%; Standard deviation = 10%

Security C has the highest reward to variability ratio.

Reward to variability ratio = (0.12 0.05)/0.1 = 0.7

Question: Suppose your initial wealth is $1000. The risk free asset makes
up -40% of your optimal balanced portfolio. Telstra makes up 15% of your
optimal risky portfolio. How much do you invest in Telstra?
Selected Answer:

$240

Correct Answer:

$210

Response
Feedback:

Amount invested in your optimal risky portfolio = $1000 x

140% = $1400; Amount invested in Telstra = $1400 x 15%
= $210

Question: Your optimal balanced portfolio consists of an optimal risky

portfolio with expected return of 20% and standard deviation of returns of
10% and a risk-free asset with expected return of 4%. Your level of risk
aversion is 8. What is the proportion of funds allocated to the optimal
portfolio of risky assets (yORP)?
Correct Answer:

200%

Question: If investors can borrow and lend at the same risk free rate,
which one of the following statements is correct?
Correct Answer:
The capital allocation line is a straight line

Question: If the borrowing rate is higher than the lending rate, which one
of the following statements is correct?
Selected
Investors with different degrees of risk aversion will always
Answer:
choose the same portfolio of risky assets
Correct
Answer:

Portfolios lying on different regions of the capital allocation

line have different reward to variability ratios

Response If the borrowing rate is higher than the lending rate, this will
Feedback: result in a kinked capital allocation line, meaning i) an
investors degree of risk aversion affects the choice of the ORP,
and ii) portfolios that lie on the CAL may have different reward
to variability ratios.
Question: Which of the following securities would a risk-averse investor
always choose as his risky asset in his balanced portfolio, given that a
Treasury-bill has a rate of return of 5%?
Selected Answer:
Cannot be determined
Correct Answer:
Response
Feedback:

Security C: E(r) = 12%; Standard deviation = 10%

Security C has the highest reward to variability ratio.

Reward to variability ratio = (0.12 0.05)/0.1 = 0.7

Question: Which of the following statements regarding the capital

allocation line is false?
Selected
The capital allocation line is also called the efficient frontier
Answer:
of risky assets in the absence of a risk-free asset
Correct
Answer:

Both A and C are true

Response The capital allocation line shows the risk return combinations of
Feedback a set of balanced portfolios that combine a risk-free asset with
:
a portfolio of risky assets in different proportions. Its slope is
the reward to variability ratio and measured as the excess
portfolio return per unit of (standard deviation) risk. Thus, both
A and C are true.