Exam 6: Risk Aversion and Capital Allocation to Risky Assets

Consider a T-bill with a rate of return of 5 percent and the following risky securities: Security A: E(r)= 0.15; Variance = 0.04 Security B: E(r)= 0.10; Variance = 0.0225 Security C: E(r)= 0.12; Variance = 0.01 Security D: E(r)= 0.13; Variance = 0.0625 From which set of portfolios,formed with the T-bill and any one of the 4 risky securities,would a risk-averse investor always choose his portfolio?

Given the capital allocation line,an investor's optimal portfolio is the portfolio that

The slope of the Capital Allocation Line formed with the risky asset and the risk-free asset is equal to

Based on their relative degrees of risk tolerance

An investor invests 40 percent of his wealth in a risky asset with an expected rate of return of 0.18 and a variance of 0.10 and 60 percent in a T-bill that pays 4 percent.His portfolio's expected return and standard deviation are __________ and __________,respectively.

The change from a straight to a kinked capital allocation line is a result of:

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 risky asset and the risk-free asset,respectively,to form a portfolio with an expected return of 0.08?

A portfolio that has an expected outcome of $115 is formed by

According to the mean-variance criterion,which one of the following investments dominates all others?

Steve is more risk-averse than Edie.On a graph that shows Steve and Edie's indifference curves,which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis. I.Steve and Edie's indifference curves might intersect. II.Steve's indifference curves will have flatter slopes than Edie's. III.Steve's indifference curves will have steeper slopes than Edie's. IV.Steve and Edie's indifference curves will not intersect. V.Steve's indifference curves will be downward sloping and Edie's will be upward sloping.

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?

Which of the following statements is (are)false? 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.

The Capital Allocation Line can be described as the

If you want to form a portfolio with an expected rate of return of 0.10,what percentages of your money must you invest in the T-bill,X,and Y,respectively if you keep X and Y in the same proportions to each other as in portfolio P?

The exact indifference curves of different investors

The optimal proportion of the risky asset in the complete portfolio is given by the equation y * = [E(r_P)-r_f]/(.01A * Variance of P).For each of the variables on the right side of the equation,discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively.Assume the investor is risk averse.

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 risky asset and the risk-free asset,respectively,to form a portfolio with an expected return of 0.13?

In the mean-standard deviation graph an indifference curve has a ________ slope.

In the utility function: U = E(r)- [-0.005As²],what is the significance of "A"?

The utility score an investor assigns to a particular portfolio,other things equal,