True or false: Assume that expected returns and standard deviations for all securities (including the risk-free rate for borrowing and lending) are known. In this case, all investors will have the same optimal risky portfolio.
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- True or false: Assume that expected returns and standard deviations for all securities (including the risk-free rate for borrowing and lending) are known. In this case, all investors will have the same optimal risky portfolio.Question #1. Portfolio theory tends to define risky investments in terms of just two factors: expected returns and variance (or standard deviation) of those expected returns. What assumptions need to be made about investors and the expected investment returns (one assumption in each case) to justify this ‘two-factor’ approach? Are these assumptions justified in real life? ‘The expected return from a portfolio of securities is the average of the expected returns of the individual securities that make up the portfolio, weighted by the value of the securities in the portfolio.’ ‘The expected standard deviation of returns from a portfolio of securities is the average of the standard deviations of returns of the individual securities that make up the portfolio, weighted by the value of the securities in the portfolio.’ Are these statements correct? What can be said about the portfolio that is represented by any point along the efficient frontier of risky investment portfolios? and What is…Which of the following statements about CAPM is true? a. The expected return of a zero-beta security or portfolio equals risk free rate. b. •The risk premium an investor expects to receive on any stock or portfolio increases with standard deviation. C. Beta measures total risk. On equilibrium, total risk is compensated by return. e. The beta of the market portfolio equals zero.
- 23. The certainty equivalent rate of a portfolio is a. the rate that a risk free investment would need to offer with certainty to be considered equally attractive as the risky portfolio. b. the rate that the investor must earn for certain to give up the use of his or her money. c. the minimum rate guarteed by institutions such as banks. d. the rate that equates "A" in the utility function with the average risk aversion coefficient for all risk averse investors. e. represented by the scaling factor "-.005' in the utility functionQuestion #1. Portfolio theory tends to define risky investments in terms of just two factors: expectedreturns and variance (or standard deviation) of those expected returns. What assumptions need to be made about investors and the expected investment returns (one assumption in each case) to justify this ‘two-factor’ approach? Are these assumptions justified in real life? Question #2. ‘The expected return from a portfolio of securities is the average of the expected returns of the individual securities that make up the portfolio, weighted by the value of the securities in the portfolio.’ ‘The expected standard deviation of returns from a portfolio of securities is the average of the standard deviations of returns of the individual securities that make up the portfolio, weighted by the value of the securities in the portfolio.’ Are these statements correct? Question #3. What can be said about the portfolio that is represented by any point along the efficientfrontier of risky investment…Which of the following is TRUE? To construct a capital market line, we use expected return as y-axis and beta as x-axis On the capital market line debt securities are located to the right of the market portfolio To construct a security market line, we use expected return as y-axis and beta as x-axis Market portfolio lays at an intersection of the average indifference curve of a risk-averse investor and the efficient portfolio
- The security market line depicts: a. Expected return as a function of systematic risk (indicated by beta) b. The market portfolio as the optimal portfolio of risky assets c. The relationship between a security’s return and the return on the index d. Portfolio combinations of the market portfolio and the risk-free asset e. Expected return as a function of volatilityIs it possible to construct a portfolio of real-world stocks that has a required return equalto the risk-free rate? Explain.As the number of stocks in a portfolio increase, the portfolio’s systematic risk can either increase or decrease. Select one: True False
- Question 2 a) Plot the Security Market Line (SML).b) Superimpose the CAPM’s required return on the SML.c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graphH2. What are the different types of expected return and related risk, for individual assets and for portfolios as a whole. Explain carefully what each type represents and give examples in each case. What type of expected returns does the CAPM model capture? What type of expected return and risk you are exposed to if you have the FTSE 100 INDEX only in the portfolio?7. Which two of the following options correctly give rules for portfolio theory? A) Portfolio returns are a weighted average of the expected returns on the individual investments. B) Portfolio standard deviation is greater than the weighted average risk of the individual investments, except for perfectly negatively correlated investments. C) Portfolio standard deviation is less than the weighted average risk of the individual investments, except for perfectly positively correlated investments. D) Expected returns are a weighted average of the portfolio return on the group of investments.