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 Od. We cannot state whether the offered portfolio is less efficient than an optimal portfolio

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 Od. We cannot state whether the offered portfolio is less efficient than an optimal portfolio

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 7MC: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the...

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The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 0.4 0.45 o (R) E[R] Figure (1) shows an investor with a conservative investment behavior. 0.3 0.25 0.2 0.15 0.1 0.05 0 0 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. 0.05 0.1 0.15 In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. O In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. Figure 2 0.2 0.25 o(R) 0.3 0.35 0.4 0.45
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
The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45
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?
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.
Which of the following statements is correct concerning a mean-variance efficient portfolio of risky assets in a world where there is also a risk-free asset? OA. It will be impossible to form a different portfolio yielding a lower level of risk unless the portfolio also earns a lower return, O B. Risk averse investors will only choose to invest in the market portfolio (M) regardless of the risk-free rate. OC. The portfolio will always achieve the maximum possible returns. O D. The portfolio will always be inside the feasible set.
Suppose that the return on the risk-free asset is rRFrRF = 15%, the return on the market portfolio is r̂Mr̂M = 20%, the market risk is σMσM = 10%, and the portfolio risk is σpσp = 15%. Then the expected rate of return on an efficient portfolio equals . Generally, a less risky portfolio would havea lower rate of return.
Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve? A. E(r) = 0.15; Standard deviation = 0.20 B. E(r) = 0.20; Standard deviation = 0.15 C. E(r) = 0.10; Standard deviation = 0.10 D. E(r) = 0.10; Standard deviation = 0.20 E. E(r) = 0.15; Standard deviation = 0.10
Construct a plausible graph that shows risk (asmeasured by portfolio standard deviation) on thex-axis and expected rate of return on the y-axis.Now add an illustrative feasible (or attainable) setof portfolios and show what portion of the feasibleset is efficient. What makes a particular portfolioefficient? Don’t worry about specific values whenconstructing the graph—merely illustrate howthings look with “reasonable” data
he risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standarddeviation of 20%. (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?
Calculate the optimal risky portfolio for the following cases when short-sales are allowed. Compute its expected return and the standard deviation of its returns. 1. Two risky assets: Rp = 3, R' = [6, 9], and 4 5 5 20 2. Three risky assets: Rp = 4, R' = [5,9, 8], and [10 0 0 E=0 40 0 0 20 3. Three risky assets: Rp = 5, R' = [12, 9, 8], and 40 10 -5] E= 10 20 0 5 0 30 4. Five risky assets: Rp = 2, R' = [5, 3, 18, 9, 2], and %3D 2 16 0. -12 5 -12 20 16 10 7 14 27 14 9. -13 8. 7 27 13
Suppose that you use Arbitrage Pricing Theory (APT) to evaluate well-diversified portfolios. The three factor portfolios used in an APT model, portfolios 1, 2, and 3, have expected returns E(r1) = 5%, E(r2) = 3%, and E(r3) = 8%. Suppose further that the risk-free rate (λ0) is 2%. Calculate the total return on a well- diversified portfolio with its beta on the first factor, βA1 = 1.1, beta on the second factor, βA2 = .9, and beta on the third factor, βA3 = 1.2.