A Capital Allocation Lines The optimal CAL is found as the r

A.

Capital Allocation Lines The optimal CAL is found as the ray from the risk free rate that is tangent to the _____________ and is called the ________________.

efficient frontier; CML

minimum variance portfolio; high range CAL

indifference curve; SML

lower half of the investment opportunity set; CAPM

B.

Capital Allocation Portfolio 1 has a standard deviation of 35% and a Sharpe ratio of 0.48. Portfolio 2 has a standard deviation of 29% and a Sharpe ratio of 0.44. Portfolio 3 has a standard deviation of 31% and a Sharpe ratio of 0.47. All investors may borrow or lend at the risk free rate. Two investors are considering holding some risky assets. For the risky asset portion of their portfolio, the investor with a high risk tolerance would choose ___________; the investor with a low risk tolerance would choose __________.

Portfolio 2; Portfolio 1

Portfolio 1; Portfolio 2

Portfolio 3; Portfolio 3

Portfolio 1; Portfolio 1

C.

I. standard deviation

II. beta

III. unsystematic risk

IV. systematic risk

I and III only

II and III only

I and IV only

II and IV only

Solution

1. Option a
efficient frontier; CML (Capital market line is the tangent to the efficient frontier where risk id optimal)

2.Opition a
Portfolio 2; Portfolio 1
Sharpe ratio is the ratio of excess return over risk free rate by standard deviation or risk
Sharpe ratio = (Return -Risk free rate)/standard deviation
Higher the Sharpe ratio lower risk tolerance and vice versa.

3. Option d  II and IV only
Diversification can minimize undiversified risk(industry specific risk) and not systematic risk. Since beta denotes systematic risk hence Beta and systematic risk are the options.

Best of Luck.God Bless