If you solve for what fraction of your wealth () you should invest in the risky asset and you get the answer of 1.4, what doesthis mean? Assume you can borrow at the risk free rate.O That you should invest 100% of your wealth in the risky assetO That you should invest 140% of your wealth in the risky asset by borrowing at the risk free rateO That you should short 140% of the risky asset and invest in the risk free assetO That you should invest somewhere between 100% and 140P% of your wealth in the risky asset by borrowing at the riskfree rate

The question is based on the concept of portfolio creation and management. The portfolio is…

If you solve for what fraction of yaur wealth (y) you shauld invest in the risky asset and you get the answer of 1.4, what does this mean? Assume you can borrow at the risk free rate O That you should invest 100% of your wealth in the risky asset O That you should invest 140% of your wwealth in the risky asset by borrowing at the risk free rate O That you should short 140% of the risky asset and invest in the risk free asset O That you should invest somewhere between 100% and 140% of your wealth in the risky asset by borrowing at the risk free rate

If you solve for what fraction of yaur wealth (y) you shauld invest in the risky asset and you get the answer of 1.4, what does this mean? Assume you can borrow at the risk free rate O That you should invest 100% of your wealth in the risky asset O That you should invest 140% of your wwealth in the risky asset by borrowing at the risk free rate O That you should short 140% of the risky asset and invest in the risk free asset O That you should invest somewhere between 100% and 140% of your wealth in the risky asset by borrowing at the risk free rate

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are considering a risky investment that you expect will either be worth 165,000 in 1 year, or 95,000, with probabilities of 0.6 and 0.4 for each outcome, respectively. You could invest in riskless T-bills at 0.047. If you invest in this risky investment, you would expect to earn a risk premium of 0.073 Given this information, what would you be willing to pay for this investment? O 113,881 O 106,615 O 118,358 O 122,321 O 109,991
An investor has two prototypes for invention, A and B, and needs the same amount of loan L for each. It is expected that either one of these prototypes will take a year to develop and will yield a reward of either RA or 0 for prototype A and either RB or 0 for prototype B. The probabilities of positive payoff are given by Prob(RA)=PA Prob (RB) =PB And these probabilities are known to the bank. The bank will only lend if the expected repayment at the end of the year generates a yield of i. If the prototype given a 0 reward, then the bank receive no repayment. Assuming risk neutrality on the part of the bank, explain why the repayments when either prototype is a success are given by (1+i) LPA, (1+i) LPB for A, B respectively. If the loan were granted, show that the expected payoff for the inventor after the bank has been repaid is given by PARA-(1+i) LPBRB-(1+i)L for A, B respectively. Under what conditions…
What is the risk neutral probability of state 1?
Dog You are considering the purchase of real estate that will provide perpetual income that should average$61,000 per year. How much will you pay for the property if you believe its market risk is the same as themarket portfolio%u2019s? The T-bill rate is 3%, and the expected market return is 12.5%.
You are considering a risky investment that you expect will either be worth 115,000 in 1 year, or 65,000, with probabilities of 0.65 and 0.35 for each outcome, respectively. You could invest in riskless T-bills at 0.058. If you invest in this risky investment, you would expect to earn a risk premium of 0.091 Given this information, what would you be willing to pay for this investment? 84,856 78,059 79,001 73,655 82,693
Investors can allocate their wealth between (i) the risk-free asset, and (ii) one of the three risky assets as shown below. For example, 20% in risk-free and 80% in A, or 30% in risk-free and 70% in B, or 40% in risk- free and 60% in C, and so on. Risky Asset E(r) A B Stdev 20% 25% 30% 35% 40% 45% The risk-free rate is 5%. If investors target an expected annual return of 30%, what is the lowest stdev that can be achieved among all the possible allocations? Show your answer in % and round to two decimals (e.g. xx.xx%).
2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability and zero otherwise i.e. TG = G = TB B = 2. Suppose firms finance their investment by borrowing 1 unit from a the fiinancial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-C
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4. Present value Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $19,000 in 14 years will have a higher price today? The security that earns an interest rate of 7.00%. The security that earns an interest rate of 10.50%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will exhibit the lower price? An investment that matures in five years An investment that matures in six years Which of the following is true about present value calculations? Other things remaining equal, the present value of a…
If you solve for what fraction of your wealth (y) you should invest in the risky asset and you get the answer of 1.4, what does this mean? Assume you can borrow at the risk free rate. a) That you should invest 100% of your wealth in the risky asset b) That you should invest 140% of your wealth in the risky asset by borrowing at the risk free rate c) That you should short 140% of the risky asset and invest in the risk free asset d) That you should invest somewhere between 100% and 140% of your wealth in the risky asset by borrowing at the risk free rate.

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