Topic 2 Quiz Flashcards
The risk of a portfolio of assets:
A. is proportional to the investment in the risk-free asset.
B. is mainly influenced by the weights and variance of the assets in the portfolio.
C. will be higher if there is positive correlation between the assets in the portfolio.
D. will increase if the expected return of the assets increase.
C. will be higher if there is positive correlation between the assets in the portfolio.
Roosters Managed Fund invests 23% of their wealth in the risk-free asset and the rest in the risky asset. Where will this portfolio lie on the capital allocation line (CAL)?
A. Below the CAL.
B. Above the CAL.
C. To the left of where the risky asset lies in the CAL.
D. To the right of where the risky asset lies in the CAL.
To the left of where the risky asset lies in the CAL.
How can someone invest more that 100% of their wealth in the risk-free asset?
A. By investing in the risky asset.
B. By investing at the risk-free rate.
C. By short-selling the risky asset.
D. By borrowing at the risk-free rate.
C. By short-selling the risky asset.
Portfolio’s that have the lowest risk for a level of return will:
A. will be subject to margin lending.
B. be unattractive to investors.
C. contain assets that have low correlation.
D. lie on the efficient frontier.
D. lie on the efficient frontier.
Which of the following statements is true?
A. A risk aversion level A=6 indicates that an investor is a risk seeker.
B. The optimal total portfolio for an investor will be where one of their utility curves is tangent to the efficient frontier.
C. The risk/return preferences of an investor can be mapped by utility curves.
D. The optimal risky portfolio will be where an investor’s utility curve is tangent to the capital market line.
C. The risk/return preferences of an investor can be mapped by utility curves.
What determines the risk on a portfolio that contains one risk free asset and one risky asset?
The risk on the risky asset and its weight in the portfolio.
What determines the risk on a two asset portfolio?
The risk of the two assets, their covariance (correlation) and their weights in the portfolio.
What is the efficient frontier?
The frontier of the investment opportunity set. Set of portfolios that have the highest return for a level of risk, or the lowest risk for a level of return. Only portfolios that have the highest return for a level of risk will lie on the efficient frontier.
If portfolios can contain up to three assets, will all the portfolios lie on the efficient frontier?
No. Some portfolios will lie on the efficient frontier and some will lie inside the frontier. No portfolios exist outside of the frontier.
What portfolios lie on a utility (indifference) curve?
Asset portfolios that give you the same level of utility (satisfaction) according to their return and risk.
Your portfolio contains a risky asset and a risk free asset. How do you decide on how much of your wealth you should invest (allocate) in the risky asset?
The weight to invest in the risk asset portfolio is where the portfolio where a utility curve is tangent to the capital allocation line.
Will all investors have the same optimal total portfolio?
No. They will have the same optimal risky asset portfolio (tangency between the efficient frontier and a capital allocation line). However, their optimal total portfolio, containing the optimal risky asset portfolio and a risk-free asset, will depend on their level of risk aversion as represented by their utility curves.
