Which of the following statements regarding risk-averse investors is true?

week 3

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Science, Business
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University
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Medium
Lê Vy
Used 31+ times
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10 questions
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1.
MULTIPLE CHOICE QUESTION
1 min • 10 pts
They only care about the rate of return.
They accept investments that are fair games.
They only accept risky investments that offer risk premiums over the risk-free rate.
They only care about the rate of return and accept investments that are fair games.
2.
MULTIPLE CHOICE QUESTION
3 mins • 10 pts
Assume an investor with the following utility function: U = E(r) - 3/2(s2).
To maximize her expected utility, she would choose the asset with an expected rate of return of _______ and a standard deviation of ________, respectively.
12%; 20%
10%; 10%
10%; 12%
8%; 10%
3.
MULTIPLE CHOICE QUESTION
3 mins • 10 pts
A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6 percent. An investor has the following utility function: U = E(r) − (A/2)s2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?
5
6
7
8
4.
MULTIPLE CHOICE QUESTION
3 mins • 10 pts
Which of the following statements regarding the Capital Allocation Line (CAL) is false?
The slope of the CAL equals the increase in the expected return of the complete portfolio per unit of additional standard deviation
The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset.
The CAL shows risk-return combinations and is also called the efficient frontier of risky assets in the absence of a risk-free asset.
The CAL shows risk-return combinations.
5.
MULTIPLE CHOICE QUESTION
3 mins • 10 pts
Security X has expected return of 12% and standard deviation of 20%. Security Y has expected return of 15% and standard deviation of 27%. If the two securities have a correlation coefficient of 0.7, what is their covariance?
0.038
0.070
0.018
0.013
6.
MULTIPLE CHOICE QUESTION
3 mins • 10 pts
Given an optimal risky portfolio with expected return of 14% and standard deviation of 22% and a risk free rate of 6%, what is the slope of the best feasible CAL?
0.64
0.08
0.33
0.36
7.
MULTIPLE CHOICE QUESTION
2 mins • 10 pts
Which statement about portfolio diversification is correct?
Proper diversification can eliminate systematic risk.
The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased.
Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return.
Typically, as more securities are added to a portfolio, total risk would be expected to decrease at a decreasing rate.
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