DO NOT COPY FROM OTHER WEBSITESCorrect and detailed answer will be Upvoted else downvoted. Thank you! 5. How is optimal asset allocation (y*) affected by the expected risk premium, the varianceof risky asset, and the degree of risk aversion?6. As p1,2 moves from +1 to -1, what happens to portfolio expected return and standarddeviation? How does the correlation affect the shape of the Investment Opportunity Set?Explain the intuition?7. Consider two investors with different risk profiles. Would the composition of the riskyportfolio differ across two investors? If not, why not? How does risk preference affect theoptimal portfolio allocation?

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 1QTD

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The optimal proportion of the risky asset in the complete portfolio is given by the equation below y*= E(Rp− Rf) A0² 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
A portfolio consisting of two assets has a correlation coefficient of 0.7. Another two-asset portfolio has a correlation coefficient of -0.6. In the absence of any other information, which portfolio should you invest in, if your main goal is to eliminate risk? Justify your reasoning. How does your answer change if your main goal is to take a certain market view and hence make a side bet? Explain more generally the advantages and disadvantages of using correlation in the decision-making process within a portfolio management context. Make sure to mention what correlation is, and what is not, as a metric tool for investment decisions.
The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45
Which of the following statements regarding the graph of the SML is most accurate? A Select one OA. The beta of Portfolios A, B, and C are identical as they fall directly on the line. B. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. C. Portfolio A has lower systematic risk than Portfolio B. D. The slope of the line is the market risk premium.
What is the relationship between correlation and the risk of the portfolio's rate of return? i. Higher correlation means greater risk reduction ii. Higher correlation means lower risk reduction iii. Lower correlation means lower risk reduction iv. Lower correlation means greater risk reduction v. None of the above
Solve it correctly
The expected rate of return of an investment ________. a. equals one of the possible rates of return for that investment b. equals the required rate of return for the investment c. is the mean value of the probability distribution of possible returns d. is the median value of the probability distribution of possible returns e. is the mode value of the probability distribution of possible returns
The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 0.4 0.45 o (R) E[R] Figure (1) shows an investor with a conservative investment behavior. 0.3 0.25 0.2 0.15 0.1 0.05 0 0 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. 0.05 0.1 0.15 In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. O In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. Figure 2 0.2 0.25 o(R) 0.3 0.35 0.4 0.45
ou have gathered the following information about two Assets: A and B
A portfolio manager is considering adding another security to his portfolio. The correlations of the five alternatives available are listed below. Which security would enable the highest level of risk diversification? a. 0.0 b. 0.25 c. -0.25 d. -0.75 e. 1.0
There are two assets 1 and 2, with returns X and Y correspondingly. Return X is a random variable with mean 1 and variance 1; return Y is a random variable with mean 1 and variance 3. We know that the expectation of X*Y is equal to 0. Find the share of asset 1 in the risk-minimizing portfolio.
1. The diversifiable risk of a portfolio: a. Is correlated with systematic risk. b. Can be made sufficiently small. c. Is zero in the real world. d. Is the risk that investors lose because of transaction costs. Which one of the following conditions determines the investor’s overall optimal portfolio? a. The marginal ratio of substitution of the investor’s utility function must be equal to the Sharpe ratio of the optimal risky portfolio. b. The standard-deviation of the overall portfolio in minimised. c. The expected return of the overall portfolio is maximised. d. The slope of the Sharpe-ratio is equal to zero. 4. Markets can never be strong-form efficient because: a. There are too many traders in them. b. Investors are rational. c. Information is costly to acquire. d. All information is public. 5. Which one of the following is not a property of a pure arbitrage portfolio? a. Zero investment. b. Zero systematic risk. c. Positive net return. d. All of the above.

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