Question

Investments A and B both offer an expected rate of return of 12. The risk (standard deviation) of A is 30 percent and the risk of B is 20 percent. Under the assumption that the an investor is risk averse and she wishes to invest in either A or B, then that investor should

.a The answer cannot be determined without knowing investors' risk preferences.

b. prefer A to B.

c. prefer a portfolio including both A and B.

d. prefer B to A.

Answer #1

- As investment B is giving the same expected return but the risk is lower, it is better that the risk averse investor prefers B to A. So the correct option is option d
- A portfolio will only increase the risk without increasing the return. So option c is incorrect.
- Option A implies that the investor chooses a more risky investment, which is not aligned to investor's risk averse nature, So option b is in correct
- As it can be clearly answered that investment B is a better choice, so option a is incorrect

Compute the expected
return, standard deviation, and value at risk for each of the
following investments:
Investment (A): Pays
$800 three-fourths of the time and a $1,200 loss otherwise.
Investment (B): Pays $1,000 loss half of the time and a $1,600 gain
otherwise.
State which
investment will be preferred by each of the following investors,
and explain why.
(i) a risk-neutral
investor
(ii) an investor who
seeks to avoid the worst-case scenario.
(iii) a risk-averse
investor.

Compute the expected
return, standard deviation, and value at risk for each of the
following investments:
Investment (A): Pays
$800 three-fourths of the time and a $1,200 loss otherwise.
Investment (B): Pays $1,000 loss half of the time and a $1,600 gain
otherwise.
State which
investment will be preferred by each of the following investors and
explain why.
(i) a risk-neutral
investor
(ii) an investor who
seeks to avoid the worst-case scenario.
(iii) a risk-averse
investor.

Suppose that the risk-free rate is 6 percent and the
expected return on the market portfolio is 15
percent. An investor with $1.5 million to invest wants to achieve a
25 percent return on a
portfolio combining the risk-free asset and the market portfolio.
Calculate how much this
investor would need to borrow at the risk-free rate in order to
establish this target expected
return. Provide your final answers up to two decimal points.

Suppose that the risk-free rate is 6 percent and the expected
return on the market portfolio is 15 percent. An investor with $1.5
million to invest wants to achieve a 25 percent return on a
portfolio combining the risk-free asset and the market portfolio.
Calculate how much this investor would need to borrow at the
risk-free rate in order to establish this target expected return.
Provide your final answers up to two decimal points.

Suppose that the risk-free rate is 6 percent and the expected
return on the market portfolio is 15 percent. An investor with $1.5
million to invest wants to achieve a 25 percent return on a
portfolio combining the risk-free asset and the market portfolio.
Calculate how much this investor would need to borrow at the
risk-free rate in order to establish this target expected return.
Provide your final answers up to two decimal points

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...

The expected return of ABC is 15 percent, and the expected
return of DEF is 23 percent. Their standard deviations are 10
percent and 23 percent, respectively, and the correlation
coefficient between them is zero.
a.
What is the expected return and standard deviation of a
portfolio composed of 25 percent ABC and 75 percent DEF?
b.
What is the expected return and standard deviation of a
portfolio composed of 75 percent ABC and 25 percent DEF?
c.
Would a...

Suppose you invest equal amounts in a portfolio with an expected
return of 12% and a standard deviation of returns of 16% and a
risk-free asset with an interest rate of 2%. calculate the expected
return on the resulting Portfolio.
A. 9%
B. unable to determine without knowing the correlation
coefficient
C. 8%
D. 7%
E. 12%
F. 2%
SHOW WORK PLEASE

Fidelity large cap fund has a Sharp ratio of 0.7 and
expected return of 18%. Fidelity small cap has a Sharpe ratio of
0.5 and expected return of 20%. Which fund should a risk-averse
investor prefer if he/she likes to construct a portfolio using the
risk-free and one of the funds?
A)
Fidelity small cap
B)
Fidelity large cap
C)
Allocate 50% to each funds
D)
Only risk free asset
E)
None of the above

The risk-free rate is 2%. Portfolio A has an expected
return of 10% and a standard deviation of 18%. You currently have
XA = 48% of your wealth invested in Portfolio A and the rest
invested in the risk-free asset. You have decided to use Portfolio
B (which has an expected return of 12% and a standard deviation of
21%). instead of Portfolio A but wish to have the same overall
expected return as before. You will thus now allocate...

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