Question

Suppose you can invest in N risky securities, but you cannot invest in risk free security....

Suppose you can invest in N risky securities, but you cannot invest in risk free security. Then, your optimal choice is to

A. invest in 1 of N securities, the one with the smallest correlation coefficient with other N-1 securities

B. invest in 1 of N securities, the one with the highest expected return and lowest standard deviation.

C. invest in the portfolio of N securities, such that the portfolio you invest in is a tangency point between the capital allocation line and your indifference curve.

D. invest in the portfolio of N securities, such that each security has portfolio weight proportional to its correlation coefficient with itself.

E. invest in the portfolio of N securities, such that the portfolio you invest in is a tangency point between the efficient frontier and your indifference curve

Homework Answers

Answer #1

Hello

Your required answer is option E : invest in the portfolio of N securities, such that the portfolio you invest in is a tangency point between the efficient frontier and your indifference curve

  • Investing in 1 security will leave you with the return and S. D. Of that security and will not yield the benefit of diversification.
  • No theory asks the investor to invest in a portfolio in proportion to the weight of correlation coefficient.

Thanks

Please drop an upvote if you find this helpful

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
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...
The two risky assets you can invest in are Exxon and BP. Exxon has a mean...
The two risky assets you can invest in are Exxon and BP. Exxon has a mean return of 8% and a standard deviation of 10%. BP has mean return of 10 percent and standard deviation of 15 percent. The correlation between the two is 0.25. The tangency portfolio has weight of 55% in Exxon. The risk free asset has return of 3.0 percent. What is the expected return and standard deviation of the tangency portfolio? You desire an expected return...
There are 2 investment -- a risk-free security that returns 2% and a risky asset that...
There are 2 investment -- a risk-free security that returns 2% and a risky asset that has expected return of 10% and standard deviation of 18%. 1). What are the weights of the complete portfolio that has an 8% expected return? 2). What is the standard deviation of that portfolio? 3). If the portfolio is valued at $100,000, how much do you invest in the risk-free security and how much do you invest in the risky asset?
You must allocate your wealth between two securities. Security 1 offers an expected return of 10%...
You must allocate your wealth between two securities. Security 1 offers an expected return of 10% and has a standard deviation of 30%. Security 2 offers an expected return of 15% and has a standard deviation of 50%. The correlation between the returns on these two securities is 0.25. a. Calculate the expected return and standard deviation for each of the following portfolios, and plot them on a graph: % Security 1 % Security 2 E(R) Standard Deviation 100 0...
Suppose you invest 30% of your money in Security A and the rest in Security B...
Suppose you invest 30% of your money in Security A and the rest in Security B Security A Security B Expected return 15% 10% Standard Deviation 0.25 0.17 Beta 1.3 1.1 Correlation coefficient between A and B 0.5 A. What is the expected return of the portfolio? B. What is the portfolio beta? C. What is the portfolio variance? Compare it with A and B variances. Is the portfolio variance larger or smaller than either A or B variances and...
security beta Standard deviation Expected return S&P 500 1.0 20% 10% Risk free security 0 0...
security beta Standard deviation Expected return S&P 500 1.0 20% 10% Risk free security 0 0 4% Stock d ( ) 30% 13% Stock e 0.8 15% ( ) Stock f 1.2 25% ( ) 5) A complete portfolio of $1000 is composed of the risk free security and a risky portfolio, P, constructed with 2 risky securities, X and Y. The optimal weights of X and Y are 80% and 20% respectively. Given the risk free rate of 4%....
Statement 1: If you can find two risky securities with a correlation of -1, theoretically you...
Statement 1: If you can find two risky securities with a correlation of -1, theoretically you can construct a risk-free portfolio using the two securities. Statement 2: Stocks A and B have returns that are independent of one another. (i.e., correlation coefficient  = zero.) There is no diversification benefit that can be achieved by combining A and B in a portfolio. a. Only Statement 1 is correct. b. Only Statement 2 is correct. c. Both Statements are correct. d....
1. There are 2 assets you can invest in: a risky portfolio with an expected return...
1. There are 2 assets you can invest in: a risky portfolio with an expected return of 6% and volatility of 15%, and a government t-bill (always used as the 'risk-free' asset) with a guaranteed return of 1%. Your risk-aversion coefficient A = 4, and the utility you get from your investment portfolio can be described in the standard way as U = E(r) - 1/2 * A * variance. Assume that you can borrow money at the risk-free rate....
Risky Asset A and Risky Asset B are combined so that the new portfolio consists of...
Risky Asset A and Risky Asset B are combined so that the new portfolio consists of 70% Risky Asset A and 30% Risky Asset B.  If the expected return and standard deviation of Asset A are 0.08 and 0.16, respectively, and the expected return and standard deviation of Asset B are 0.10 and 0.20, respectively, and the correlation coefficient between the two is 0.25: (13 pts.) What is the expected return of the new portfolio consisting of Assets A & B...
Part A: Assume the risk–free rate is 3.50%. Using the stock and bond portfolios from problem...
Part A: Assume the risk–free rate is 3.50%. Using the stock and bond portfolios from problem 1, what is the bond weight in the tangency portfolio formed by creating the optimal risky portfolio from this stock and bond portfolio?  Enter your answer rounded to two decimal places STOCK AND BOND INFO: You put 70% of your money in a stock portfolio that has an expected return of 14.95% and a standard deviation of 44%. You put the rest of you money...