2. An investor currently holds the market portfolio, which has an expected return of 10% and standard deviation of 20%. The risk-free rate is 4%. This portfolio does not maximise utility as the utility maximising portfolio has a return of 16%. What could the investor do to increase return to the required level and what must happen to the portfolio standard deviation at the same time if the portfolio is to remain an efficient portfolio

2. An investor currently holds the market portfolio, which has an expected return of 10% and standard deviation of 20%. The risk-free rate is 4%. This portfolio does not maximise utility as the utility maximising portfolio has a return of 16%. What could the investor do to increase return to the required level and what must happen to the portfolio standard deviation at the same time if the portfolio is to remain an efficient portfolio

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standarddeviation of 20%. Answer the following questions.a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition ofA 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 expectedreturn and standard deviation of the investor’s optimal complete portfolio?
An investor currently holds the portfolio, which has an expected return of 10% and standard deviation of 20%.the risk free rate 4%.this portfolio does not maximise utility as the utility maximising portfolio has a return of 16%what could the investor do to increase return to the required level and what must happen to the portfolio standard deviation at the same time if portfolio is to remain an efficient portfolio?
Given the non-satiation and risk aversion assumptions, which of the following five portfolios has the most desirable risk and return characteristics and thus will be chosen by investors ? The risk-free rate of return is 6%. (Explain or justify your answer briefly.) Portfolio Average Annual Return (%) Standard Deviation (%) R2 14 21 0.70 K 16 24 0.98 Q 24 28 0.96 17 25 0.92 11 18 0.60
A financial advisor is offering you a product with an expected return of 8% and a return standard deviation of 12%. Is this an efficient investment if the risk-free rate is 1%, the market return is 14%, and the market volatility is 22%? Select one: O a. The offered portfolio is more efficient than an optimal portfolio Ob. The offered portfolio is less efficient than an optimal portfolio O. The offered portfolio is less volatile but offers a higher return than an optimal portfolio O d. We cannot state whether the offered portfolio is less efficient than an optimal portfolio
3. Asset 1 has an expected return of 10% with a standard deviation of 25%, and asset 2 has an expected return of 15% and a standard deviation of 35%. The covariance between the returns is 0.0175 and the risk-free rate is 8%. (a) What is the optimal portfolio consisting of risky assets and risk-free asset if you want an average return of 0.10? Answer. (b) Can you find a portfolio consisting of risky and risk-free assets with average return of 0.10 and variance of return 0.009? Why or why not? Answer.
A. You are told that the expected return of the market portfolio is 10%, and its standard deviation is 10%. There exists a risk-free asset in the economy. You hold an efficient portfolio with an expected return of 12% and a standard deviation of 15%. [hint: The efficient portfolio is a combination of the market portfolio and the risk-free asset.](1) In forming this efficient portfolio do you borrow or lend? Support your answer with relevant calculations.
A financial advisor is offering you a product with an expected return of 8% and a return standard deviation of 12%. is this an efficient investment if the risk-free rate is 1%, the market return is 14%, and the market volatility is 22%? Select one: Oa The offered portfolio is more efficient than an optimal portfolio Ob. The offered portfolio is less efficient than an optimal portfolio O. The offered portfolio is less volatile but offers a higher return than an optimal portfolio O d. We cannot state whether the offered portfolio is less efficient than an optimal portfolio
Consider an economy with a (net) risk-free return r1 = 0:1 and a market portfolio with normally distributed return, with ErM = 0:2 and 2M = 0:02. Suppose investor A has CARA preferences, with risk aversion coe¢ cient equal to 1 and an endowment of 10. a) Write down the maximization problem for the investor. b) Determine the amount invested in the risky portfolio and in the risk-free asset. c) Suppose another investor (B) has a coe¢ cient of absolute risk aversion equal to 2 (and the same endowment 10). Compute his optimal portfolio and compare it to that of investor A. Explain the di§erent results for investors A and B. d) Finally, consider Investor C with mean-variance preferences Ec V ar(c) (and endowment 10). Compute his optimal portfolio and compare it to that of investors A and B (as obtained in questions b and c). Compare your result with those obtained for investors A and B.
You are told that the expected return of the market portfolio is 10%, and its standard deviation is 10%. There exists a risk-free asset in the economy. You hold an efficient portfolio with an expected return of 12% and a standard deviation of 15%. [hint: The efficient portfolio is a combination of the market portfolio and the risk-free asset.] (1) In forming this efficient portfolio do you borrow or lend? Support your answer with relevant calculations. (2) What is the risk-free rate?
Consider two well-diversified portfolios: Portfolio 1 has an expected return of 8% and a beta of 0.80 while Portfolio 2 has an expected return of 13% and a beta of 1.50. If the risk-free rate is 1.5%, which portfolio would a rational risk-averse investor prefer and why? O A. Portfolio 2 because it has the higher reward to risk ratio. O B. Portfolio 1 because it has the higher reward to risk ratio. OC. Portfolio 2 because it has the higher reward. O D. Portfolio 1 because it has the lower risk.
(a) Determine the expected return of security X (b) To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio’s systematic risk? How would portfolio expected return change (higher or lower) if you add this security?
Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The betas of portfolios A and B and the respective returns are reported below. Assuming no arbitrage opportunities exist, the risk-free rate of return must be: Portfolio β Expected Return A 0.2 9% B 1.2 19% Group of answer choices 8% 9% 6% 7%

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