Questions for Demand for Risky Assets

Interm. Micro 2015

Torayno, Cabangon, Coralde, Nicanor, Carlos, De Castro, Sy
1.) The demand curve for a particular stock at any point in time is
A) very inelastic but not infinitely so.
B) almost infinitely inelastic.
C) infinitely elastic.
D) fairly elastic but not infinitely elastic.
Answer: C
2.) Which of the following assets is almost riskless?
A) Common stocks
B) Long-term corporate bonds
C) U.S. treasury bills
D) Long-term government bonds
E) Apartment buildings
Answer: C
3.) Which of the following statements is true?
A) The expected return and standard deviation of return are greater for common stock
than for U.S. treasury bills.
B) The expected return on common stocks is greater than the expected return on U.S
treasury bills, but the standard deviation of return for common stocks is less than the
standard deviation of return for U.S. treasury bills
C) The expected return on common stocks is less than the expected return on U.S
treasury bills, but the standard deviation of return for common stocks is greater than the
standard deviation of return for U.S. treasury bills.
D) The expected return and standard deviation of return are less for common stocks than
for U.S. treasury bills.
Answer: A
Situation: Hillary can invest her family savings in two assets: riskless treasury bills or a
risky vacation home real estate project on an Arkansas river. The expected return on
treasury bills is 4 percent with a standard deviation of zero. The expected return on the
real estate project is 30 percent with a standard deviation of 40 percent.
4.) If Hillary invests 30 percent of her savings in the real estate project and the remainder
in treasury bills, the expected return on her portfolio is:
A) 4 percent.
B) 11.8 percent.
C) 17 percent.
D) 22.2 percent.
E) 30 percent.
Answer: B

5.) If Hillary invests 30 percent of her savings in the real estate project and remainder in
treasury bills, the standard deviation of her portfolio is:
A) 0 percent.
B) 12 percent.
C) 28 percent.
D) 30 percent.
E) 40 percent.
Answer: B
6.) Refer to Scenario 5.10. Hillary's indifference curves showing her preferences toward
risk and return can be shown in a diagram. Expected return is plotted on the vertical axis
and standard deviation of return on the horizontal axis. Although her indifference curves
are upward sloping and bowed downward, their slope is very gradual (they are almost
horizontal). These indifference curves reveal that Hillary is:
A) risk neutral.
B) risk averse.
C) risk loving.
D) irrational.
Answer: B
7.) Refer to Scenario 5.10. Hillary's indifference curves showing her preferences toward
risk and return can be shown in a diagram. Expected return is plotted on the vertical axis
and standard deviation of return on the horizontal axis. Although her indifference curves
are upward sloping and bowed downward, their slope is very gradual (they are almost
horizontal). With these indifference curves Hillary will invest:
A) most of her savings in treasury bills, and a small percentage in the real estate project.
B) all of her savings in treasury bills.
C) half of her savings in treasury bills and half in the real estate project.
D) most of her savings in the real estate project, and a small percentage in treasury bills.
Answer: D
8.) Assume that an investor invests in one risky and one risk free asset. Let m be the
standard deviation of the risky asset and b the proportion of the portfolio invested in the
risky asset. The standard deviation of the portfolio is then equal to __________.
m
A)

b
(1 - m )

B) (1 - b)
C) (1 - b) m
D) bm
Answer: D

9.) The slope of the budget line that expresses the tradeoff between risk and return for an
asset can be represented by
A) (Rf - Rm)/m.
B) (Rm - Rf)/m.
C) Rm - Rf.
D) b.
Answer: B
10.) Last year, on advice from your sister, you bought stock in Burpsy Soda at
$100/share. During the year, you collected a $2 dividend and then sold the stock for
$120/share. You experienced a
A) dividend yield of 9%.
B) dividend yield of 20%.
C) dividend yield of 11%.
D) total return of 20%.
E) total return of 22%.
Answer: E
11.) This year, on advice from your sister, you bought tobacco company stock at
$50/share. During the year, you collected an $8 dividend, but due to the company's losses
in medical lawsuits its stock fell to $40/share. At this point, you sell, realizing a
A) dividend yield of -16% and a capital loss of 20%.
B) dividend yield of 16% and a capital loss of 20%.
C) dividend loss 10%.
D) capital loss of 10%.
E) total loss of 20%.
Answer: B
12.) The correlation between an asset's real rate of return and its risk (as measured by its
standard deviation) is usually
A) positive.
B) strictly linear.
C) flat.
D) negative.
E) chaotic.
Answer: A
13.) Because of the relationship between an asset's real rate of return and its risk, one
would expect to find all of the following, except one. Which one?
A) Corporate stocks have higher rates of return than U.S. Treasury bonds.
B) Corporate stocks have higher rates of return than U.S. Treasury bills.
C) Corporate stocks have higher rates of return than corporate bonds.
D) Stocks of smaller companies have higher expected rates of return than stocks of larger
companies.

E) Mutual funds including stocks of companies in politically volatile developing

countries do not have as high a rate of return as mutual funds restricted to stocks of
companies in developed economies.
Answer: E
14.) Nervous Norman holds 70% of his assets in cash, earning 0%, and 30% of his assets
in an insured savings account, earning 2%. The expected return on his portfolio
A) is 0%.
B) is 0.6%
C) is 1%.
D) is 2%.
E) cannot be determined without knowing what the dollar value of his assets is.
Answer: B
15.) Daring Dora holds 90% of her assets in high-technology stocks, earning 12%, and
10% in long-term government bonds, earning 6%. The expected return on her portfolio
A) is 6%.
B) is 9%.
C) is 11.4%
D) is 12%.
E) cannot be determined without knowing what the dollar value of her assets is.
Answer: C
16.) The standard deviation of a two-asset portfolio (with a risky and a non-risky asset) is
equal to
A) the fraction invested in the risky asset times the standard deviation of the non-risky
asset.
B) the fraction invested in the non-risky asset times the standard deviation of the risky
asset.
C) the fraction invested in the risky asset times the standard deviation of that asset.
D) the fraction invested in the non-risky asset times the standard deviation of that asset.
Answer: C
17.) The slope of the budget line, faced by an investor deciding what percentage of her
portfolio to place in a risky asset, increases when the
A) standard deviation of the portfolio gets smaller.
B) standard deviation of the risky asset gets larger.
C) rate of return on the risk-free asset gets larger.
D) rate of return on the risky asset gets larger.
E) rate of return on money gets larger.
Answer: D

18.) The budget line in portfolio analysis shows that

A) the expected return on a portfolio increases as the standard deviation of that return
increases.
B) the expected return on a portfolio increases as the standard deviation of that return
decreases.
C) the expected return on a portfolio is constant.
D) the standard deviation of a portfolio is constant.
E) a riskless portfolio will earn a zero return.
Answer: A
19.) The indifference curve between expected return and the standard deviation of return
for a risk-averse investor
A) is downward-sloping.
B) is upward-sloping.
C) is horizontal.
D) is vertical.
E) can take any shape.
Answer: B
20.) The indifference curves of two investors are plotted against a single budget line.
Indifference curve A is shown as tangent to the budget line at a point to the left of
indifference curve B's tangency to the same line.
A) Investors A and B are equally risk averse.
B) Investor A is more risk averse than investor B.
C) Investor A is less risk averse than investor B.
D) It is not possible to say anything about the risk aversion of the two investors, but they
will hold the same portfolio.
E) It is not possible to say anything about either the risk aversion or the portfolio of the
two investors.
Answer: B
21.) The indifference curves of two investors are plotted against a single budget line.
Indifference curve A is shown as tangent to the budget line at a point to the left of
indifference curve B's tangency to the same line.
A) Investors A and B will hold the same portfolio.
B) Investors A and B will have different portfolios of the same standard deviation.
C) Investors A and B will have different portfolios of the same rate of return.
D) Investors A and B will have different portfolios but have the same level of risk
aversion.
E) Investor A will expect to earn a lower rate of return than investor B.
Answer: E
22.) Jack is near retirement and worried that if the stock market falls he will not be able
to wait to take his funds out, and will have to sell at the bottom of the market. Richard

thinks the probability of a stock market downturn is the same, but he is only 40 and could
therefore wait for another turnaround. They face the same budget line. Jack's risk/return
indifference curve
A) will be concave; Richard's will be convex.
B) will be convex; Richard's will be concave.
C) will be tangent to the budget line at a point to the left of Richard's.
D) will be tangent to the budget line at a point to the right of Richard's.
E) must still be tangent to the budget line at the same point as Richard's.
Answer: C
23.) Consider the following statements when answering this question;
I. The variance of the returns of an investor's portfolio can be reduced by selling assets
from the portfolio, and investing the proceeds in other assets where returns are positively
correlated with the portfolio's remaining assets.
II. The value of complete information is always positive.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Answer: D
24.) Consider the following statements when answering this question;
I. The allocation of a risk averse investor's portfolio between a risk free asset and a
risky asset never changes if the rate of return on both assets increases by the same
amount.
II. Given the choice between investing in a risk free asset or a risky asset with higher
expected returns, the utility maximizing portfolio of a risk neutral or risk loving investor
would never include the risk free asset.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Answer: B
25.) Is it possible for an investor to allocate more than 100% of their assets to the stock
market?
A) No, this is not theoretically plausible.
B) No, federal law prohibits this kind of investment.
C) Yes, investors can borrow money to buy stocks on margin.
D) none of the above
Answer: C
26.) Suppose an investor equally allocates their wealth between a risk-free asset and a
risky asset. If the MRS of the current allocation is less than the slope of the budget line,
then the investor should:
A) shift more of their wealth to the risky asset.

B) shift more of their wealth to the risk-free asset.

C) keep the same asset allocation.
D) We do not have enough information to answer this question.
Answer: A
27.) Use the following statements to answer this question:
I. The real rate of return on an investment is the nominal return minus the rate of
inflation.
II. The real rate of return on an investment cannot be negative.
A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are false.
Answer: B