A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio: A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. B. The expected return on the stock market increases, but the standard deviation of the stock market remains the same. C. The return on risk-free Treasury bills increases.
A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio: A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. B. The expected return on the stock market increases, but the standard deviation of the stock market remains the same. C. The return on risk-free Treasury bills increases.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio:
A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same.
B. The expected return on the stock market increases, but the standard deviation of the stock market remains the same.
C. The return on risk-free Treasury bills increases.
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