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18. An investor uses a risky asset A and a risk free asset to build a...

18. An investor uses a risky asset A and a risk free asset to build a complete portfolio, and rf = 3%, E(rA) = 7%, and σA = 12%. Which one of the following portfolios B, C, D, and E can NOT be on the CAL?

(a) E(rB) = 5%, and σB = 6%. (b) E(rC) = 6%, and σC = 9%. (c) E(rD) = 8%, and σD = 15%. (d) E(rE) = 9%, and σE = 20%.

19. Which one of the following is FALSE about the efficient frontier of multiple risky assets?

(a) Every point on the efficient frontier has the same Sharpe Ratio. (b) Given the same level of risk, the efficient frontier gives the portfolio with the highest return. (c) Given the same level of return, the efficient frontier gives the portfolio with the lowest risk. (d) None of the above.

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Answer #1

18. The slope of CAL is (Expected retrun of the Portfolio - Risk free rate)/(Standard Deviation of the portfolio)

Considering 50% weight of the Risk free asset and Risky asset A,

the Slope is computed as given below -

Expected return of Portfolio = 0.5*3% + 0.5*7% = 5%

Variance of the portoflio = 0.5^2*12%^2 =.36%

Standarad Deviatio of portfolio = 6%

Slope = (5%-3%)/6% = 0.33

a) Using the similar computation as above, Slope of the CAL for the combination of risk free asset and risky asset B is 0.33

b) Using the similar computation as above, slope of CAL for the combination of risk free asset and risky asset C is 0.33

c) Using the similar computation as above, slope of CAL for the combination of risk free asset and risky asset D is 0.33

d) Using the similar computation as above, slope of CAL for the combination of risk free asset and risky asset E is 0.3 only. Therefore, E can not be the CAL.

19.

The dots on the cuve are the different portfolios which offer highest return for the given level of risk.

a) Sharpe ratio is the slope of line connects the risk free rate and portfolio with the combination of risky asset and risk free asset. This definetely varies with each of the portfolio on the effecient frontier. Hence the statement  is False.

So, the correct answer for the question.

b) The statement is True.

c) The statement is True.

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