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3;. i(t!ri6a**y7 (ma**-&irm (t!6k( ha'e earned hi%her return( than *ar%e-&irm (t!6k(. When 'ie+ed in the
6!nte8t !& an e&&i6ient market7 thi( (u%%e(t( that .
. (ma** &irm( are better run than *ar%e &irm(
. %!'ernment (ub(idie( a'ai*ab*e t! (ma** &irm( pr!du6e e&&e6t( that are di(6ernib*e in (t!6k market(tati(ti6(
. (ma** &irm( are ri(kier than *ar%e &irm(
5. (ma** &irm( are n!t bein% a66urate*y repre(ented in the data 3. In 6a*6u*atin% the 'arian6e !& a p!rt&!*i!H( return(7 (?uarin% the de'iati!n( &r!m the mean re(u*t( in:
I. re'entin% the (um !& the de'iati!n( &r!m a*+ay( e?ua*in% zer!II. 8a%%eratin% the e&&e6t( !& *ar%e p!(iti'e and ne%ati'e de'iati!n(
III. number &!r +hi6h the unit i( per6enta%e !& return(
. a'era%e hi(t!ri6a* e86e(( return( &!r the a((et under 6!n(iderati!n
5. a'era%e abn!rma* return !n the inde8 p!rt&!*i! 41. )rea(ury bi**( are payin% a 4, rate !& return. ri(k-a'er(e in'e(t!r +ith a ri(k a'er(i!n !& A L 3 (h!u*d
in'e(t entire*y in a ri(ky p!rt&!*i! +ith a (tandard de'iati!n !& 24, !n*y i& the ri(ky p!rt&!*i!H( e8pe6tedreturn i( at *ea(t .
42. In the mean (tandard de'iati!n %raph7 the *ine that 6!nne6t( the ri(k-&ree rate and the !ptima* ri(ky p!rt&!*i!7 P 7 i( 6a**ed the .
. 6apita* a**!6ati!n *ine
. indi&&eren6e 6ur'e
. in'e(t!rH( uti*ity *ine
5. (e6urity market *ine 43. @!(t (tudie( indi6ate that in'e(t!r(H ri(k a'er(i!n i( in the ran%e .
. 1-3
. 1.$-4
. 3-$.2
5. 4-; 44. )+! a((et( ha'e the &!**!+in% e8pe6ted return( and (tandard de'iati!n( +hen the ri(k-&ree rate i( $,:
n in'e(t!r +ith a ri(k a'er(i!n !& A L 3 +!u*d &ind that !n a ri(k-return ba(i(.
. !n*y a((et i( a66eptab*e
. !n*y a((et i( a66eptab*e
. neither a((et n!r a((et i( a66eptab*e
5. b!th a((et and a((et are a66eptab*e 4$. i(t!ri6a**y7 the be(t a((et &!r the *!n%-term in'e(t!r +antin% t! &end !&& the threat( !& in&*ati!n and ta8e(
5. ea* rate !& return 4. p!rt&!*i! +ith a 2$, (tandard de'iati!n %enerated a return !& 1$, *a(t year +hen )-bi**( +ere payin%
4.$,. )hi( p!rt&!*i! had a Sharpe rati! !& .
. .22
. .;0
. .42
5. .2$ 4>. !n(ider a )rea(ury bi** +ith a rate !& return !& $, and the &!**!+in% ri(ky (e6uritie(:
Se6urity : E Cr D L .1$ 'arian6e L .0400Se6urity : E Cr D L .10 'arian6e L .022$Se6urity : E Cr D L .12 'arian6e L .1000
Se6urity 5: E Cr D L .13 'arian6e L .0;2$
)he in'e(t!r mu(t de'e*!p a 6!mp*ete p!rt&!*i! by 6!mbinin% the ri(k-&ree a((et +ith !ne !& the (e6uritie(menti!ned ab!'e. )he (e6urity the in'e(t!r (h!u*d 6h!!(e a( part !& her 6!mp*ete p!rt&!*i! t! a6hie'e the be(t < +!u*d be .
49. !u pur6ha(ed a (hare !& (t!6k &!r #29. Kne year *ater y!u re6ei'ed #2.2$ a( di'idend and (!*d the (hare&!r #2>. !ur h!*din%-peri!d return +a( .
. -3.$,
. -3.4$,
. 4.31,
5. >.03, $0. Se6urity ha( a hi%her (tandard de'iati!n !& return( than (e6urity . We +!u*d e8pe6t that:
I. Se6urity +!u*d ha'e a hi%her ri(k premium than (e6urity .II. )he *ike*y ran%e !& return( &!r (e6urity in any %i'en year +!u*d be hi%her than the *ike*y ran%e !&return( &!r (e6urity .III. )he Sharpe rati! !& +i** be hi%her than the Sharpe rati! !& .
. I !n*y
. I and II !n*y
. II and III !n*y
5. I7 II7 and III $1. )he h!*din%-peri!d return !n a (t!6k +a( 2$,. It( endin% pri6e +a( #1>7 and it( be%innin% pri6e +a( #1;.
$2. n in'e(t!r in'e(t( 0, !& her +ea*th in a ri(ky a((et +ith an e8pe6ted rate !& return !& 1$, and a 'arian6e!& $,7 and (he put( 30, in a )rea(ury bi** that pay( $,. er p!rt&!*i!H( e8pe6ted rate !& return and(tandard de'iati!n are and re(pe6ti'e*y.
5. #29.$ $4. !n(ider the &!**!+in% t+! in'e(tment a*ternati'e(: Fir(t7 a ri(ky p!rt&!*i! that pay( a 1$, rate !& return
+ith a pr!babi*ity !& 40, !r a $, rate !& return +ith a pr!babi*ity !& ;0,. Se6!nd7 a )rea(ury bi** that pay(;,. )he ri(k premium !n the ri(ky in'e(tment i( .
. 1,
. 3,
. ;,
5. 9, $$. !n(ider the &!**!+in% t+! in'e(tment a*ternati'e(: Fir(t7 a ri(ky p!rt&!*i! that pay( a 20, rate !& return
+ith a pr!babi*ity !& ;0, !r a $, rate !& return +ith a pr!babi*ity !& 40,. Se6!nd7 a )rea(ury bi** that pay(;,. I& y!u in'e(t #$07000 in the ri(ky p!rt&!*i!7 y!ur e8pe6ted pr!&it +!u*d be .
$;. !u in'e(t #107000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !& a ri(ky a((et +ith ane8pe6ted rate !& return !& 1$, and a (tandard de'iati!n !& 21, and a )rea(ury bi** +ith a rate !& return !&$,. !+ mu6h m!ney (h!u*d be in'e(ted in the ri(ky a((et t! &!rm a p!rt&!*i! +ith an e8pe6ted return !&11,
. #;7000
. #47000
. #7000
5. #37000 $. !u in'e(t #17000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !& a ri(ky a((et +ith an
e8pe6ted rate !& return !& 1;, and a (tandard de'iati!n !& 20, and a )rea(ury bi** +ith a rate !& return !&;,. !& y!ur 6!mp*ete p!rt&!*i! (h!u*d be in'e(ted in the ri(ky p!rt&!*i! i& y!u +ant y!ur6!mp*ete p!rt&!*i! t! ha'e a (tandard de'iati!n !& 9,.
. 100,
. 90,
. 4$,
5. 10, $>. !u in'e(t #17000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !& a ri(ky a((et +ith an
e8pe6ted rate !& return !& 1;, and a (tandard de'iati!n !& 20, and a )rea(ury bi** +ith a rate !& return !&
;,. p!rt&!*i! that ha( an e8pe6ted 'a*ue in 1 year !& #17100 6!u*d be &!rmed i& y!u .
. p*a6e 40, !& y!ur m!ney in the ri(ky p!rt&!*i! and the re(t in the ri(k-&ree a((et
. p*a6e $$, !& y!ur m!ney in the ri(ky p!rt&!*i! and the re(t in the ri(k-&ree a((et
. p*a6e ;0, !& y!ur m!ney in the ri(ky p!rt&!*i! and the re(t in the ri(k-&ree a((et
5. p*a6e $, !& y!ur m!ney in the ri(ky p!rt&!*i! and the re(t in the ri(k-&ree a((et
$9. !u in'e(t #17000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !& a ri(ky a((et +ith ane8pe6ted rate !& return !& 1;, and a (tandard de'iati!n !& 20, and a )rea(ury bi** +ith a rate !& return !&;,. )he (*!pe !& the 6apita* a**!6ati!n *ine &!rmed +ith the ri(ky a((et and the ri(k-&ree a((et i(appr!8imate*y .
;2. !u are 6!n(iderin% in'e(tin% #17000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !&)rea(ury bi**( that pay $, and a ri(ky p!rt&!*i!7 P 7 6!n(tru6ted +ith t+! ri(ky (e6uritie(7 M and . )he!ptima* +ei%ht( !& M and in P are ;0, and 40,7 re(pe6ti'e*y. M ha( an e8pe6ted rate !& return !& 14,7and ha( an e8pe6ted rate !& return !& 10,. )! &!rm a 6!mp*ete p!rt&!*i! +ith an e8pe6ted rate !& return!& 11,7 y!u (h!u*d in'e(t !& y!ur 6!mp*ete p!rt&!*i! in )rea(ury bi**(.
. 19,
. 2$,
. 3;,
5. $0, ;3. !u are 6!n(iderin% in'e(tin% #17000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !&
)rea(ury bi**( that pay $, and a ri(ky p!rt&!*i!7 P 7 6!n(tru6ted +ith t+! ri(ky (e6uritie(7 M and . )he!ptima* +ei%ht( !& M and in P are ;0, and 40, re(pe6ti'e*y. M ha( an e8pe6ted rate !& return !& 14,7and ha( an e8pe6ted rate !& return !& 10,. )! &!rm a 6!mp*ete p!rt&!*i! +ith an e8pe6ted rate !& return
!& >,7 y!u (h!u*d in'e(t appr!8imate*y in the ri(ky p!rt&!*i!. )hi( +i** mean y!u +i** a*(!in'e(t appr!8imate*y and !& y!ur 6!mp*ete p!rt&!*i! in (e6urity M and 7re(pe6ti'e*y.
. 0, ;0, 40,
. 2$, 4$, 30,
. 40, 24, 1;,
5. $0, 30, 20, ;4. !u are 6!n(iderin% in'e(tin% #17000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !&
)rea(ury bi**( that pay $, and a ri(ky p!rt&!*i!7 P 7 6!n(tru6ted +ith t+! ri(ky (e6uritie(7 M and . )he!ptima* +ei%ht( !& M and in P are ;0, and 40,7 re(pe6ti'e*y. M ha( an e8pe6ted rate !& return !& 14,7and ha( an e8pe6ted rate !& return !& 10,. I& y!u de6ide t! h!*d 2$, !& y!ur 6!mp*ete p!rt&!*i! in theri(ky p!rt&!*i! and $, in the )rea(ury bi**(7 then the d!**ar 'a*ue( !& y!ur p!(iti!n( in M and 7re(pe6ti'e*y7 +!u*d be and .
;$. !u are 6!n(iderin% in'e(tin% #17000 in a 6!mp*ete p!rt&!*i!. )he 6!mp*ete p!rt&!*i! i( 6!mp!(ed !&)rea(ury bi**( that pay $, and a ri(ky p!rt&!*i!7 P 7 6!n(tru6ted +ith t+! ri(ky (e6uritie(7 M and . )he!ptima* +ei%ht( !& M and in P are ;0, and 40,7 re(pe6ti'e*y. M ha( an e8pe6ted rate !& return !& 14,7and ha( an e8pe6ted rate !& return !& 10,. )he d!**ar 'a*ue( !& y!ur p!(iti!n( in M7 7 and )rea(ury bi**(+!u*d be 7 7 and 7 re(pe6ti'e*y7 i& y!u de6ide t! h!*d a 6!mp*ete p!rt&!*i! that ha( an e8pe6ted return !& >,.
. #1;2 #$9$ #243
. #243 #1;2 #$9$
. #$9$ #1;2 #243
5. #$9$ #243 #1;2 ;;. !u ha'e the &!**!+in% rate( !& return &!r a ri(ky p!rt&!*i! &!r (e'era* re6ent year(:
I& y!u in'e(ted #17000 at the be%innin% !& 200>7 y!ur in'e(tment at the end !& 2011 +!u*d be +!rth .
5. 1$.;0, ;>. (e6urity +ith n!rma**y di(tributed return( ha( an annua* e8pe6ted return !& 1>, and (tandard de'iati!n
!& 23,. )he pr!babi*ity !& %ettin% a return bet+een -2>, and ;4, in any !ne year i( .
. ;>.2;,
. 9$.44,
. 99.4,
5. 100,
;9. )he @anha+kin Fund ha( an e8pe6ted return !& 1;, and a (tandard de'iati!n !& 20,. )he ri(k-&ree rate i(4,. What i( the re+ard-t!-'!*ati*ity rati! &!r the @anha+kin Fund
4. a(ed !n the !ut6!me( in the &!**!+in% tab*e7 6h!!(e +hi6h !& the (tatement( be*!+ i( CareD 6!rre6t
I. )he 6!'arian6e !& (e6urity and (e6urity i( zer!.II. )he 6!rre*ati!n 6!e&&i6ient bet+een (e6uritie( and i( ne%ati'e.III. )he 6!rre*ati!n 6!e&&i6ient bet+een (e6uritie( and i( p!(iti'e.
. I !n*y
. I and II !n*y
. II and III !n*y
5. I7 II7 and III $. ((et ha( an e8pe6ted return !& 1$, and a re+ard-t!-'ariabi*ity rati! !& .4.
((et ha( an e8pe6ted return !& 20, and a re+ard-t!-'ariabi*ity rati! !& .3. ri(k-a'er(e in'e(t!r +!u*d pre&er a p!rt&!*i! u(in% the ri(k-&ree a((et and .
. a((et
. a((et
. n! ri(ky a((et
5. )he an(+er 6ann!t be determined &r!m the data %i'en. ;. ddin% additi!na* ri(ky a((et( t! the in'e(tment !pp!rtunity (et +i** %enera**y
23. !u put ha*& !& y!ur m!ney in a (t!6k p!rt&!*i! that ha( an e8pe6ted return !& 14,and a (tandard de'iati!n !& 24,. !u put the re(t !& y!ur m!ney in a ri(ky b!nd
p!rt&!*i! that ha( an e8pe6ted return !& ;, and a (tandard de'iati!n !& 12,. )he(t!6k and b!nd p!rt&!*i!( ha'e a 6!rre*ati!n !& .$$. )he (tandard de'iati!n !& there(u*tin% p!rt&!*i! +i** be .
. *!6ated !n the e&&i6ient &r!ntier t! th!(e *!6ated !n the 6apita* market *ine
. *!6ated !n the 6apita* market *ine t! th!(e *!6ated !n the e&&i6ient &r!ntier
. at !r near the minimum-'arian6e p!int !n the e&&i6ient &r!ntier
5. that are ri(k-&ree t! a** !ther a((et 6h!i6e( 2.)he !ptima* ri(ky p!rt&!*i! 6an be identi&ied by &indin%:
I. )he minimum-'arian6e p!int !n the e&&i6ient &r!ntier II. )he ma8imum-return p!int !n the e&&i6ient &r!ntier and the minimum-'arian6e
p!int !n the e&&i6ient &r!ntier
III. )he tan%en6y p!int !& the 6apita* market *ine and the e&&i6ient &r!ntier I=. )he *ine +ith the (teepe(t (*!pe that 6!nne6t( the ri(k-&ree rate t! the e&&i6ient&r!ntier
. I and II !n*y
. II and III !n*y
. III and I= !n*y
5. I and I= !n*y 2>.)he re+ard-t!-'ariabi*ity rati! i( &!und !n the 6apita*
44. Semit!!* !rp. ha( an e8pe6ted e86e(( return !& ;, &!r ne8t year. !+e'er7 &!re'ery une8pe6ted 1, 6han%e in the market7 Semit!!*H( return re(p!nd( by a &a6t!r!& 1.2. Supp!(e it turn( !ut that the e6!n!my and the (t!6k market d! better thane8pe6ted by 1.$, and Semit!!*H( pr!du6t( e8perien6e m!re rapid %r!+th thananti6ipated7 pu(hin% up the (t!6k pri6e by an!ther 1,. a(ed !n thi( in&!rmati!n7
+hat +a( Semit!!*H( a6tua* e86e(( return
. ,
. >.$,
. >.>,
5. 9.2$,
4$.)he part !& a (t!6kH( return that i( (y(temati6 i( a &un6ti!n !& +hi6h !& the&!**!+in% 'ariab*e(
I. =!*ati*ity in e86e(( return( !& the (t!6k marketII. )he (en(iti'ity !& the (t!6kH( return( t! 6han%e( in the (t!6k marketIII. )he 'arian6e in the (t!6kH( return( that i( unre*ated t! the !'era** (t!6k market
. I !n*y
. I and II !n*y
. II and III !n*y
5. I7 II7 and III 4;. St!6k ha( a beta !& 1.27 and (t!6k ha( a beta !& 1. )he return( !& (t!6k are
(en(iti'e t! 6han%e( in the market than are the return( !& (t!6k .
4.Whi6h ri(k 6an be partia**y !r &u**y di'er(i&ied a+ay a( additi!na* (e6uritie( areadded t! a p!rt&!*i!
I. )!ta* ri(k II. Sy(temati6 ri(k
III. Firm-(pe6i&i6 ri(k
. I !n*y
. I and II !n*y
. I7 II7 and III
5. I and III
4>. 66!rdin% t! )!binH( (eparati!n pr!perty7 p!rt&!*i! 6h!i6e 6an be (eparated int!t+! independent ta(k( 6!n(i(tin% !& and .
. identi&yin% a** in'e(t!r imp!(ed 6!n(traint( identi&yin% the (et !& (e6uritie( that6!n&!rm t! the in'e(t!rH( 6!n(traint( and !&&er the be(t ri(k-return trade-!&&(
. identi&yin% the in'e(t!rH( de%ree !& ri(k a'er(i!n 6h!!(in% (e6uritie( &r!mindu(try %r!up( that are 6!n(i(tent +ith the in'e(t!rH( ri(k pr!&i*e
. identi&yin% the !ptima* ri(ky p!rt&!*i! 6!n(tru6tin% a 6!mp*ete p!rt&!*i! &r!m)-bi**( and the !ptima* ri(ky p!rt&!*i! ba(ed !n the in'e(t!rH( de%ree !& ri(ka'er(i!n
5. 6h!!(in% +hi6h ri(ky a((et( an in'e(t!r pre&er( a66!rdin% t! the in'e(t!rH( ri(k-a'er(i!n *e'e* minimizin% the < by *endin% at the ri(k-&ree rate
49. !u are 6!n(tru6tin% a (6atter p*!t !& e86e(( return( &!r (t!6k 'er(u( the market
inde8. I& the 6!rre*ati!n 6!e&&i6ient bet+een (t!6k and the inde8 i( -17 y!u +i**&ind that the p!int( !& the (6atter dia%ram and the *ine !& be(t &it ha(a .
. a** &a** !n the *ine !& be(t &it p!(iti'e (*!pe
. a** &a** !n the *ine !& be(t &it ne%ati'e (*!pe
. are +ide*y (6attered ar!und the *ine p!(iti'e (*!pe
5. are +ide*y (6attered ar!und the *ine ne%ati'e (*!pe
;1. Whi6h !& the &!**!+in% (tatement( i( CareD true re%ardin% time di'er(i&i6ati!n
I. )he (tandard de'iati!n !& the a'era%e annua* rate !& return !'er (e'era* year(+i** be (ma**er than the 1-year (tandard de'iati!n.II. F!r a *!n%er time h!riz!n7 un6ertainty 6!mp!und( !'er a %reater number !&
;>.5e6rea(in% the number !& (t!6k( in a p!rt&!*i! &r!m $0 t! 10 +!u*d *ike*y .
. in6rea(e the (y(temati6 ri(k !& the p!rt&!*i!
. in6rea(e the un(y(temati6 ri(k !& the p!rt&!*i!
. in6rea(e the return !& the p!rt&!*i!
5. de6rea(e the 'ariati!n in return( the in'e(t!r &a6e( in any !ne year ;9. I& y!u +ant t! kn!+ the p!rt&!*i! (tandard de'iati!n &!r a three-(t!6k p!rt&!*i!7
y!u +i** ha'e t! .
. 6a*6u*ate t+! 6!'arian6e( and !ne tri'arian6e
. 6a*6u*ate !n*y t+! 6!'arian6e(
. 6a*6u*ate three 6!'arian6e(
5. a'era%e the 'arian6e( !& the indi'idua* (t!6k( 0. Whi6h !& the &!**!+in% 6!rre*ati!n 6!e&&i6ient( +i** pr!du6e the *ea(t
di'er(i&i6ati!n bene&it
. -.;
. -.3
. 0
5. .> 1. Whi6h !& the &!**!+in% 6!rre*ati!n 6!e&&i6ient( +i** pr!du6e the m!(t
9. What i( the (tandard de'iati!n !& a p!rt&!*i! !& t+! (t!6k( %i'en the &!**!+in%data: St!6k ha( a (tandard de'iati!n !& 1>,. St!6k ha( a (tandard de'iati!n !& 14,. )he p!rt&!*i! 6!ntain( 40, !& (t!6k 7 and the 6!rre*ati!n 6!e&&i6ient
bet+een the t+! (t!6k( i( -.23.
. 9.,
. 12.2,
. 14,
5. 1$.;, >0. What i( the (tandard de'iati!n !& a p!rt&!*i! !& t+! (t!6k( %i'en the &!**!+in%
data: St!6k ha( a (tandard de'iati!n !& 30,. St!6k ha( a (tandard de'iati!n !&
1>,. )he p!rt&!*i! 6!ntain( ;0, !& (t!6k 7 and the 6!rre*ati!n 6!e&&i6ient bet+een the t+! (t!6k( i( -1.
. 0,
. 10.>,
. 1>,
5. 24, >1. )he e8pe6ted return !& a p!rt&!*i! i( >.9,7 and the ri(k-&ree rate i( 3.$,. I& the
p!rt&!*i! (tandard de'iati!n i( 12,7 +hat i( the re+ard-t!-'ariabi*ity rati! !& the p!rt&!*i!
>2. pr!e6t ha( a ;0, 6han6e !& d!ub*in% y!ur in'e(tment in 1 year and a 40,6han6e !& *!(in% ha*& y!ur m!ney. What i( the (tandard de'iati!n !& thi(in'e(tment
. 2$,
. $0,
. ;2,
5. 3, >3. pr!e6t ha( a $0, 6han6e !& d!ub*in% y!ur in'e(tment in 1 year and a $0,
6han6e !& *!(in% ha*& y!ur m!ney. What i( the e8pe6ted return !n thi( in'e(tment pr!e6t