Sưu tầm: Sang Trần
Chapter 06 Risk Aversion and Capital Allocation to Risky Assets Answer Key
Multiple Choice Questions
1. Which of the following statements regarding risk-averse investors is true?
A. They only care about the rate of return.
B. They accept investments that are fair games.
C. They only accept risky investments that offer risk premiums over the risk-free rate.
D. They are willing to accept lower returns and high risk.
E. They only care about the rate of return and accept investments that are fair games.
Risk-averse investors only accept risky investments that offer risk premiums over the risk-free
rate.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Aversion
358
,Sưu tầm: Sang Trần
2. Which of the following statements is (are) true?
I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.
A. I only
B. II only
C. I and II only
D. II and III only
E. II, III, and IV only
Risk-averse investors consider a risky investment only if the investment offers a risk
premium. Risk-neutral investors look only at expected returns when making an investment
decision.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Aversion
3. Which of the following statements is (are) false?
I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.
A. I only
B. II only
C. I and II only
D. II and III only
E. III, and IV only
Risk-averse investors consider a risky investment only if the investment offers a risk
premium. Risk-neutral investors look only at expected returns when making an investment
decision.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Aversion
359
,Sưu tầm: Sang Trần
4. In the mean-standard deviation graph an indifference curve has a ________ slope.
A. negative
B. zero
C. positive
D. northeast
E. cannot be determined
The risk-return trade-off is one in which greater risk is taken if greater returns can be
expected, resulting in a positive slope.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Risk Tolerance
5. In the mean-standard deviation graph, which one of the following statements is true
regarding the indifference curve of a risk-averse investor?
A. It is the locus of portfolios that have the same expected rates of return and different
standard deviations.
B. It is the locus of portfolios that have the same standard deviations and different rates of
return.
C. It is the locus of portfolios that offer the same utility according to returns and standard
deviations.
D. It connects portfolios that offer increasing utilities according to returns and standard
deviations.
E. It is irrelevant to making a decision of what portfolio would best suit the investor.
Indifference curves plot trade-off alternatives that provide equal utility to the individual (in
this case, the trade-offs are the risk-return characteristics of the portfolios).
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Tolerance
360
, Sưu tầm: Sang Trần
6. In a return-standard deviation space, which of the following statements is (are) true for
risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-
axis and the standard deviation-axis, respectively.)
I) An investor's own indifference curves might intersect.
II) Indifference curves have negative slopes.
III) In a set of indifference curves, the highest offers the greatest utility.
IV) Indifference curves of two investors might intersect.
A. I and II only
B. II and III only
C. I and IV only
D. III and IV only
E. II and IV only
An investor's indifference curves are parallel (thus they cannot intersect) and have positive
slopes. The highest indifference curve (the one in the most northwestern position) offers the
greatest utility. Indifference curves of investors with similar risk-return trade-offs might
intersect.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Risk Tolerance
7. Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,
A. for the same risk, David requires a higher rate of return than Elias.
B. for the same return, Elias tolerates higher risk than David.
C. for the same risk, Elias requires a lower rate of return than David.
D. for the same return, David tolerates higher risk than Elias.
E. cannot be determined.
The more risk averse the investor, the less risk that is tolerated for a given rate of return.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Risk Aversion
361
Chapter 06 Risk Aversion and Capital Allocation to Risky Assets Answer Key
Multiple Choice Questions
1. Which of the following statements regarding risk-averse investors is true?
A. They only care about the rate of return.
B. They accept investments that are fair games.
C. They only accept risky investments that offer risk premiums over the risk-free rate.
D. They are willing to accept lower returns and high risk.
E. They only care about the rate of return and accept investments that are fair games.
Risk-averse investors only accept risky investments that offer risk premiums over the risk-free
rate.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Aversion
358
,Sưu tầm: Sang Trần
2. Which of the following statements is (are) true?
I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.
A. I only
B. II only
C. I and II only
D. II and III only
E. II, III, and IV only
Risk-averse investors consider a risky investment only if the investment offers a risk
premium. Risk-neutral investors look only at expected returns when making an investment
decision.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Aversion
3. Which of the following statements is (are) false?
I) Risk-averse investors reject investments that are fair games.
II) Risk-neutral investors judge risky investments only by the expected returns.
III) Risk-averse investors judge investments only by their riskiness.
IV) Risk-loving investors will not engage in fair games.
A. I only
B. II only
C. I and II only
D. II and III only
E. III, and IV only
Risk-averse investors consider a risky investment only if the investment offers a risk
premium. Risk-neutral investors look only at expected returns when making an investment
decision.
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Aversion
359
,Sưu tầm: Sang Trần
4. In the mean-standard deviation graph an indifference curve has a ________ slope.
A. negative
B. zero
C. positive
D. northeast
E. cannot be determined
The risk-return trade-off is one in which greater risk is taken if greater returns can be
expected, resulting in a positive slope.
AACSB: Analytic
Bloom's: Remember
Difficulty: Basic
Topic: Risk Tolerance
5. In the mean-standard deviation graph, which one of the following statements is true
regarding the indifference curve of a risk-averse investor?
A. It is the locus of portfolios that have the same expected rates of return and different
standard deviations.
B. It is the locus of portfolios that have the same standard deviations and different rates of
return.
C. It is the locus of portfolios that offer the same utility according to returns and standard
deviations.
D. It connects portfolios that offer increasing utilities according to returns and standard
deviations.
E. It is irrelevant to making a decision of what portfolio would best suit the investor.
Indifference curves plot trade-off alternatives that provide equal utility to the individual (in
this case, the trade-offs are the risk-return characteristics of the portfolios).
AACSB: Analytic
Bloom's: Remember
Difficulty: Intermediate
Topic: Risk Tolerance
360
, Sưu tầm: Sang Trần
6. In a return-standard deviation space, which of the following statements is (are) true for
risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-
axis and the standard deviation-axis, respectively.)
I) An investor's own indifference curves might intersect.
II) Indifference curves have negative slopes.
III) In a set of indifference curves, the highest offers the greatest utility.
IV) Indifference curves of two investors might intersect.
A. I and II only
B. II and III only
C. I and IV only
D. III and IV only
E. II and IV only
An investor's indifference curves are parallel (thus they cannot intersect) and have positive
slopes. The highest indifference curve (the one in the most northwestern position) offers the
greatest utility. Indifference curves of investors with similar risk-return trade-offs might
intersect.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Risk Tolerance
7. Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,
A. for the same risk, David requires a higher rate of return than Elias.
B. for the same return, Elias tolerates higher risk than David.
C. for the same risk, Elias requires a lower rate of return than David.
D. for the same return, David tolerates higher risk than Elias.
E. cannot be determined.
The more risk averse the investor, the less risk that is tolerated for a given rate of return.
AACSB: Analytic
Bloom's: Understand
Difficulty: Intermediate
Topic: Risk Aversion
361
