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Exam 6: Risk Aversion and Capital Allocation to Risky Assets

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Question 31

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Discuss the characteristics of indifference curves,and the theoretical value of these curves in the portfolio building process.

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Indifference curves represent the trade-...

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Question 32

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What would be the dollar value of your positions in X,Y,and the T-bills,respectively,if you decide to hold a portfolio that has an expected outcome of $1,120?

A) Cannot be determined
B) $568; $378; $54
C) $568; $54; $378
D) $378; $54; $568
E) $108; $514; $378

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Question 33

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Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills. The information below refers to these assets. $\begin{array} { l l } \mathrm { E } \left( \mathrm { R } _ { \mathrm { p } } \right) & 12.00 \% \\\text { Standard Deviation of P } & 7.20 \% \\\text { T-Bill rate } & 3.60 \% \\& \\\text { Proportion of Complete Portfolio in P } & 80 \% \\\text { Proportion of Complete Portfolio in T-Bills } & 20 \% \\& \\\text { Composition of P: } & \\\text { Stock A } & 40.00 \% \\\text { Stock B } & 25.00 \% \\\text { Stock C } & 35.00 \% \\\hline\text { Total } & \underline { 100.00 \% } \\\hline\end{array}$ -What is the equation of Bo's Capital Allocation Line?

A fair game

The presence of risk means that

You invest $1000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. -What percentages of your money must be invested in the risk-free asset and the risky asset,respectively,to form a portfolio with a standard deviation of 0.20?

An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70 percent in a T-bill that pays 6 percent.His portfolio's expected return and standard deviation are __________ and __________,respectively.

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.

Which of the following statements regarding the Capital Allocation Line (CAL) is false?

The variable (A) in the utility function represents the:

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. -What percentages of your money must be invested in the risk-free asset and the risky asset,respectively,to form a portfolio with a standard deviation of 0.08?

U = E(r) - (A/2) s², where A = 4.0. $\begin{array}{lll}\underline{\text { Investment }} & \underline{\text { Expected Return E(r) }} &\underline{ \text { Standard Deviation }} \\1 & 0.12 & 0.3 \\2 & 0.15 & 0.5 \\3 & 0.21 & 0.16 \\4 & 0.24 & 0.21\end{array}$ -Based on the utility function above,which investment would you select?

To build an indifference curve we can first find the utility of a portfolio with 100% in the risk-free asset,then

Assume an investor with the following utility function: U = E(r) - 3/2(s²) . -To maximize her expected utility,she would choose the asset with an expected rate of return of _______ and a standard deviation of ________,respectively.

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03. -What percentages of your money must be invested in the risk-free asset and the risky asset,respectively,to form a portfolio with a standard deviation of 0.08?

Assume an investor with the following utility function: U = E(r) - 3/2(s²) . -To maximize her expected utility,which one of the following investment alternatives would she choose?

What is a fair game? Explain how the term relates to a risk-averse investor's attitude toward speculation and risk and how the utility function reflects this attitude.

Which investment would you select if you were risk neutral?

The Capital Market Line I.is a special case of the Capital Allocation Line. II.represents the opportunity set of a passive investment strategy. III.has the one-month T-Bill rate as its intercept. IV.uses a broad index of common stocks as its risky portfolio.

Your client, Bo Regard, holds a complete portfolio that consists of a portfolio of risky assets (P) and T-Bills. The information below refers to these assets. $\begin{array} { l l } \mathrm { E } \left( \mathrm { R } _ { \mathrm { p } } \right) & 12.00 \% \\\text { Standard Deviation of P } & 7.20 \% \\\text { T-Bill rate } & 3.60 \% \\& \\\text { Proportion of Complete Portfolio in P } & 80 \% \\\text { Proportion of Complete Portfolio in T-Bills } & 20 \% \\& \\\text { Composition of P: } & \\\text { Stock A } & 40.00 \% \\\text { Stock B } & 25.00 \% \\\text { Stock C } & 35.00 \% \\\hline\text { Total } & \underline { 100.00 \% } \\\hline\end{array}$ -What is the standard deviation of Bo's complete portfolio?