16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an investment strategy yielding strictly negative net gain today and no loss in any state of the world in the future. 23. If two assets have exactly the same payoffs in one year, their value must be the same today, if and only if there is an arbitrage opportunity. 24. The call option value decreases with time to maturity.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A.

17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential.

18. The return earned on a risk free portfolio must be equal to the risk free interest rate.

19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio.

20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance.

21. The market portfolio of all available assets is the supply of risky assets.

22. An arbitrage opportunity is an investment strategy yielding strictly negative net gain today and no loss in any state of the world in the future.

23. If two assets have exactly the same payoffs in one year, their value must be the same today, if and only if there is an arbitrage opportunity.

24. The call option value decreases with time to maturity.

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

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