Efficient portfolios Figure 8.11 purports to show the range of attainable combinations of expected return and standard deviation. a. Which diagram is incorrectly drawn and why? b. Which is the efficient set of portfolios? c. If r, is the rate of interest, mark with an X the optimal stock portfolio. of (0) A (b) B
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- 3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?K To get the maximum benefit of diversification, an investor should OA. include in his portfolio stocks whose returns are not correlated with each other OB. include in his portfolio stocks whose returns are positively correlated with each other OC. include only one stock in his portfolio. OD. include in his portfolio stocks whose returns are negatively correlated with each otherJohn owns the following portfolio of stocks. What is the return on her portfolio? Stock Amount Invested Return on Stock A $4,000 7.5% B $2,000 11.0% C $4,000 9.3%
- 1. Which of the following is INCORRECT? a All of a stock's risk could be unsystematic. b. A negative beta stock has an expected return less than the risk-free rate. c. Anticipated returns on any given stock are always greater than 0. d. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). 2. Which of the following measures the total risk of a portfolio? a. Beta b. Standard Deviation c. Correlation Coefficient d. Alpha 3. Which of the following stocks have the highest systematic risk? a A stock with high correlation to the market and high returm volatility. b. A stock with low correlation to the market and a high return volatility. c A stock with high correlation to the market and a low return volatility. d. A stock with low correlation to the market and a low return volatility. 4. Which of the following companics have the lowest systematic risk? a A company that sells soups (Campbells), beta=0.60 b. A coffee company…Question 11 The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is a) 36.30%. b) 5.84%. c) 19.60%. d) 24.17%. e) 26.0%.What is the expected return from an investment if there is a 20 percent chance of a 4 percent return, a 40 percent chance of a 8 percent return, and a 40 percent chance of a 12 percent return
- QUESTION 2 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient of correlation increases. The standard deviation of the portfolio returns decreases as the coefficient of correlation increases. The standard deviation of the portfolio returns increases as the coefficient of correlation decreases.An agent (a financial institution or individual financial investor) that has agreed to deliver a specific asset (as yet unpossessed) to another party at a future date has:A. taken a long position.B. hedged against risk.C. entered a forward transactionD. taken a short positionE. bought an option.(a) Calculate the risk-premium on this portfolio and provide a brief interpretation of it (b) Calculate the minimum sale price of the capital assets for the average investor.
- A risk-averse investor will: Answer a. Always accept a greater risk with a greater expected return b. Only invest in assets providing certain returns c. Sometimes accept a lower expected return if it means less ri d. Never accept lower risk if it means accepting a lower expected returnA risk-averse investor will: a. Always accept a greater risk with a greater expected return b. Only invest in assets providing certain returns c. Sometimes accept a lower expected return if it means less ri d. Never accept lower risk if it means accepting a lower expected return3b. By investing in a particular stock, Mullins can in one year make a profit of $5000 with a probability 0.4 or lose $5000 with probability of 0.6. What is Mullins expected gain?