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##### Consider an investor who believes in CAPM and is willing to bear the amount of systematic

**Description**

solution

**Question**

1) Consider an investor who believes in CAPM and is willing to bear the amount of systematic risk given beta of 1.2. Investor buys the passive portfolio by combining the market portfolio and T-bills. What should be the weight to T-bill in her passive portfolio?;A) -0.2;B) 1.2;C) 1;D) 0.833;E) cannot be determined;2) Consider a risky portfolio, A, with and expected rate of return of 0.25 and a standard deviation of return 0.50, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve for a risk averse investor?;A) E(r) = 0.15, Standard deviation = 0.25;B) E(r) = 0.15, Standard deviation = 0.70;C) E(r) = 0.40, Standard deviation = 0.10;D) E(r) = 0.25, Standard deviation = 0.15;E) E(r) = 0.30, Standard deviation = 0.40;3) Assume that an investor solves the capital allocation problem in the market with a risk-free asset and a risky security that has negative risk premium. What position an investor should take in the risky security? Can an investor lose money at this position and why?;A) Long. Yes, because security is risky.;B) He does not buy the risky security. No, because he does not hold it.;C) Long. No because the portfolio is optimal.;D) Short. No, because the portfolio is optimal.;E) Short. Yes, because security is risky.;4) Consider an efficient frontier of one hundred risky assets in the economy where short-selling is allowed and assume that any portfolio on the efficient frontier has a short position in at least one risky security. Now consider a mutual fund that refuses to sell short. Where should the efficient frontier of this fund be with respect to the efficient frontier of investors who take short position?;A) They should be the same;B) The efficient frontier of the mutual fund should be above that of the investors;C) The efficient frontier of the mutual fund should be below that of the investors;D) The efficient frontier of the mutual fund should coincide with that of the investors but only for a certain range of expected returns.;E) Cannot be determined;5) Which of the following assumptions are not used in CAPM?;A) investors could be risk averse and risk loving.;B) Investments are limited to publicly traded financial assets;C) No taxes and transactions costs;D) Investors are rational mean-variance optimizers;E) Each investor in the market is a price-taker;9) Passive investing;A) May be accomplished by investing in index mutual funds.;B) involves considerable security selection;C) involves considerable transaction costs;D) a and c;E) b and c;Additional Requirements;Min Pages: 1;Level of Detail: Only answer needed

Paper#29926 | Written in 18-Jul-2015

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