Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 9, Problem 5CQQ
To determine
Based ondiversification and its benefit.
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An agent (a financial institution or individual financial investor) that has agreed to deliver a specific asset (as yet unpossessed) to another party at a future date has:A. taken a long position.B. hedged against risk.C. entered a forward transactionD. taken a short positionE. bought an option.
A risk-averse investor will:
a. Always accept a greater risk with a greater expected return
b. Only invest in assets providing certain returns
c. Sometimes accept a lower expected return if it means less ri
d. Never accept lower risk if it means accepting a lower expected return
A risk-averse investor will:
Answer
a. Always accept a greater risk with a greater expected return
b. Only invest in assets providing certain returns
c. Sometimes accept a lower expected return if it means less ri
d. Never accept lower risk if it means accepting a lower expected return
Chapter 9 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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- When you are long an option and you delta hedge, you want A. traders talking a lot about other asset classes and ignore your underlying B. volatility to increase and the underlying to move around a lot C. the cost of carry to narrow D. volatility to decrease and the underlying to just stop movingarrow_forwardWhat term do economists use to describe the tendency for people to prefer certain outcomes over risky situations? a. The precautionary principle b. Risk differentiationc. Risk uncertainty d. Risk aversion e. Risk managementarrow_forward1. Which of the following is INCORRECT? a All of a stock's risk could be unsystematic. b. A negative beta stock has an expected return less than the risk-free rate. c. Anticipated returns on any given stock are always greater than 0. d. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). 2. Which of the following measures the total risk of a portfolio? a. Beta b. Standard Deviation c. Correlation Coefficient d. Alpha 3. Which of the following stocks have the highest systematic risk? a A stock with high correlation to the market and high returm volatility. b. A stock with low correlation to the market and a high return volatility. c A stock with high correlation to the market and a low return volatility. d. A stock with low correlation to the market and a low return volatility. 4. Which of the following companics have the lowest systematic risk? a A company that sells soups (Campbells), beta=0.60 b. A coffee company…arrow_forward
- Which of the following statements is false? a. The slope of the security market line is measured by beta. b. Company-specific risk can be diversified away. c. The market risk premium is affected by attitudes about risk. d. Higher beta stocks have a higher required return.arrow_forward3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A 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 expected return and standard deviation of the investor’s optimal complete portfolio?arrow_forwardHow can risks be measured for a company like Publix supermarket, and what rules can help managers make decisions under uncertainty?arrow_forward
- 1)Which of the statement is WRONG? A.The total risk of a security contains risk which is not rewarded. B.Diversification eliminates both idiosyncratic risk and systematic risk. C.There is no clear relationship between the volatility and return of individual stocks. D.The market portfolio contains all shares of all stocks and securities in the market. 2)Which statement below is an appropriate characterization of the asset beta? A. The asset beta is an estimate of the systematic risk a stock would have once leverage is added into the analysis. B.The asset beta is larger than the equity beta for small stocks. C.The asset beta is readily observable for comparable firms. D. The asset beta is an estimate of the systematic risk a stock would have in the absence of leveragearrow_forward1. In terms of the Markowitz portfolio model, explain how an investor identifies his / her optimal portfolio. What specific information does an investor need to identify an optimal portfolio?arrow_forward6. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect thatA.every risk-averse person will earn a higher rate of return than every non-risk averse person.B.every risk-averse person will earn a lower rate of return than every non-risk averse person.C.the average risk-averse person will earn a higher rate of return than the average non-risk averse person.D.the average risk-averse person will earn a lower rate of return than the average non-risk averse person. 7.The real exchange rate equals the relative A.price of domestic and foreign currency.B.price of domestic and foreign goods.C.rate of domestic and foreign interest. D.None of the above is correct. 8.According to the theory of liquidity preference, an increase in the price level causes theA.interest rate and investment to rise.B.interest rate and investment to fall.C.interest rate to rise and investment to fall.D.interest rate to fall and…arrow_forward
- Which of the following describes the attribute of a risk neutral investor? Select one: a. An investor that makes decisions based on the advice of financial planners. b. An investor that makes decisions based on the expected return of assets. C. An investor that makes decisions based on the credit rating of assets.arrow_forwardEfficient portfolios Figure 8.11 purports to show the range of attainable combinations of expected return and standard deviation. a. Which diagram is incorrectly drawn and why? b. Which is the efficient set of portfolios? c. If r, is the rate of interest, mark with an X the optimal stock portfolio. rf A (a) B A (b) Barrow_forwardIn the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called _________. A. the capital allocation lineB. the indifference curveC. the investor's utility lineD. the security market linearrow_forward
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