Question

A risk-neutral individual _____.

A. prefers a sure return to an uncertain prospect generating the same expected return

B. will forgo a sure return in favor of an uncertain prospect generating the same expected return

C. is indifferent between a sure return and an uncertain prospect generating the same expected return

D. will avoid all risky investments no matter what the return

Answer #1

Answer: Option C

A risk-neutral individual is always indifferent between the gains and the losses and chooses the options which are between the both. A consolidated decision will be taken by the risk-neutral individual. For example, the calculation of expected monetary benefits is done to identify the returns for all the alternatives based on the probabilities. Finally, the one alternatives with the highest expected monetary value will be chosen. So, risk neutral individual takes both risks and benefits into the picture before deciding.

Explain, using a diagram, why a risk-averse individual, choosing
between two prospects with the same expected value, prefers the
prospect with the smaller spread in the out- comes.

If a risk neutral consumer compares a risky lottery to a sure
thing, the risk premium required to prefer the lottery is:
a. zero
b. positive
c. negative
d. depends on the particular lottery

Evaluate the following statements as true or false. Provide your
reasoning:
a. A risk-averse person prefers the expected utility of income
of a risky bet to the utility of the expected income of the same
bet.
b. A risk-averse person would always take a sure $10 rather than
a 10% chance at $100.
c. A risk-averse person has an increasing marginal utility of
income (or wealth).

a) Assume that the risk free rate is 6.5% and that the expected
return on the market is 13%. What is the required rate of return on
a stock that has a beta of 0.6?
b) As a risk averse investor, which of the following rules would
you use when choosing between two securities A and B?
A. Choose the one with the higher return when both A and B have
the same risk
B. Choose the one with the...

If the risk-free rate increases while the expected return to the
market portfolio stays the same, then according the the capital
asset pricing model ___________.
A. the expected return to stocks with betas above one will
increase, and stocks with betas below one will decrease.
B. the expected return to stocks with betas above one will
decrease, and stocks with betas below one will increase.
C. the expected return to all stocks, regardless of betas, will
decrease.
D. the expected...

You are managing a risky portfolio with an expected rate of
return of 17% and a standard deviation of 27%. You think that this
risky portfolio is best one that you can construct to deliver the
best tradeoff between risk premium and return. The T-bill rate is
7%.
(1)Your client Eric chooses to invest
70% of a portfolio in your fund and 30% in a T-bill money market
fund.
(a) What is the expected return and
standard deviation of your...

You are hired to make investment decisions for a large pension
fund. You meet with representatives from the company to figure out
what kind of choices to make. To get things started you try to
figure out their risk preferences. You discuss the concept of risk
and return with them to figure out what their level of risk
aversion is. You ask them if they would rather invest in the
portfolio that offers an expected rate of return of 10%...

1) The systematic risk of an investment:
A. is likely to be higher in a rising
market
B. results from its own unique factors
C. depends upon market volatility
D. cannot be reduced by diversification
2) Consider the CAPM. The risk-free rate is 5% and the
expected return on the market is 15%. What is the beta on a stock
with an expected return of 12%?
A. 0.5
B. 0.7
C. 1.2
D. 1.4
3) An asset with a negative...

Assume the following: The risk-free rate is 2%, the expected
return on the market is 7%, and this firm's stock is twice as
risky as the market on average. What would be the cost of equity
for this firm? A. 12% B. 20% C. 14% D. 8%

You have the opportunity to invest $20 , with an uncertain
return. To simulate uncertainty, we will use a deck of four playing
cards consisting of two aces and two kings. The deck has been
shuffled and placed face down on the table in front of you. You
will now draw two cards, one after the other:
If you draw two aces, you will receive $60
If you draw an ace and a king, you will receive $30
if you...

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