Homework for Chapter 7

1. A riskfree asset
(a) has a return correlation coefficient with securities of 1.
(b) has a negative return covariance with each security.
(c) has a standard deviation of return of zero.
(d) has a positive return covariance with many securities.
(e) has a return correlation coefficient with securities of -1.
2. An investor has a planned holding period of one year. An instrument that would
qualify as a riskfree asset would be
(a) blue-chip common stock.
(b) corporate bond maturing in one year.
(c) six month insured C.D. from a bank.
(d) 30-day Treasury Bill.
(e) one-year Treasury Bill.
3. The purchase of a riskfree Treasury Bill
(a) is riskfree lending.
(b) is an acceptance of default risk.
(c) eliminates inflation-rate risk.
(d) is riskfree borrowing.
(e) still has reinvestment risk based on periodic interest receipts.
4. The change in market value for a long-term Treasury Bond occur from
(a) reinvestment-rate risk.
(b) market risk. (c) interest-rate risk.
(d) unique risk.
(e) default risk.
5. An investor develops a portfolio with 25% in a riskfree asset with a return of 6% and
the rest in a risky asset with expected return of 9% and standard deviation of 6%.
The standard deviation for the portfolio is:
(a) 20.3%. (b) 4.5%. (c) 0.0%. (d) 27.0%.
6. An investor has a portfolio with 60% in a riskfree asset with a return of 5% and the
rest in a risky asset with an expected return of 12% and a standard deviation of 10%.
Respectively, the expected return and standard deviation of the portfolio are
(a) 10.5%. (b) 9.7%. (c) 11.4%. (d) 12.6%.
7. An investor wishes to devise a portfolio consisting of a riskfree asset and a risk
portfolio. As his proportion placed in the riskfree asset increases, the expected
effects on the total portfolio's expected return and standard deviation would be to
(a) rise, rise.
(b) decline, rise.
(c) decline, remain the same.
(d) decline, decline.
(e) rise, remain the same.
8. The potential combinations of a riskfree lending with a risky portfolio results in a
plot of expected returns and standard deviations of
(a) straight line with negative slope.
(b) a nonlinear curve with increasing, positive slope.
(c) a flat line.
(d) a nonlinear curve with a decreasing, negative slope.
(e) straight line with positive slope.
9. The line connecting the riskfree return with the tangent point of the efficient set of
risky portfolios indicates combinations with
(a) lowest expected return for a given risk.
(b) an efficient level of risk.
(c) highest expected risk for a given expected return.
(d) highest expected return for a given risk.
10. An infinitely risk-averse investor will find his indifference curve tangent
(a) at the efficient risk portfolio.
(b) half way between the riskfree asset and the efficient risky portfolio.
(c) at the riskfree asset.
(d) to the northeast of the efficient risk portfolio.

11. Riskfree borrowing assumes

(a) the rate paid in equal to the rate earned on riskfree lending.
(b) the loan does not need to be repaid.
(c) the riskfree borrowing rate is greater than the riskfree lending rate.
(d) there is no interest charged for the loan.
12. Introducing riskfree borrowing into the model gives the investor the opportunity to
(a) repay former loans. (b) use margin.
(c) reduce leverage.
(d) sell short.
(e) put more money into the riskfree asset.
13. For an investor using margin
in the risky portfolio would
(a) zero.
(b)
(c) greater than 1.
(d)

to calculate the expected return, the proportion invested

be:
may be less than or greater than 1.
less than 1.

14. If the proportion invested in the riskfree asset is -.4, the proportion invested in
the risky portfolio is: (a) -1.4.
(b) 0.6.
(c) 0.0.
(d) 1.4.
(e) -0.6.
15. A margin user has a situation where the riskfree rate is 6% and the risky portfolio
has an expected return of 12% with a standard deviation of 15%. If the proportion in
risky portfolio is 1.8, the expected return is:
(a) 14.6%. (b) 19.2%. (c) 21.6%. (d) 16.8%.
16. A margin user has a proportion 1.3 invested in the risky portfolio that has .4 in A
with an expected return of 14%, .6 in B with an expected return of 18%. If the
riskfree rate is 5%, her expected return is
(a) 21.3%. (b) 16.4%. (c) 19.8%. (d) 18.2%.
17. The only person or organization eligible to borrow at the riskfree rate is
(a) the U.S. Treasury.
(b) a brokerage firm.
(c) a consumer with a good credit rating.
(d) a corporation with a high bond rating.
(e) a municipality.
18. Commercial paper is a source of short-term funds for
(a) the U.S. Treasury.
(b) municipalities.
(c) corporations with a good credit rating.
(d) consumers with poor credit rating.
(e) corporations with a poor credit rating.