in an "alternate" asset with a standard deviation of 0.41. What expect return does this "alternate" asset need to provide to make the investor indifferent between it and the "baseline" asset? Give you answer as a decimal to four decimal places.
in an "alternate" asset with a standard deviation of 0.41. What expect return does this "alternate" asset need to provide to make the investor indifferent between it and the "baseline" asset? Give you answer as a decimal to four decimal places.
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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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
![An investor makes decisions using quadratic utility U = E[r] - Ao² with a
risk-aversion coefficient of 6. They have found a "baseline" asset with an expected
return of 0.11 and standard deviation of 0.21. They are also considering investing
in an "alternate" asset with a standard deviation of 0.41. What expect return does
this "alternate" asset need to provide to make the investor indifferent between it
and the "baseline" asset? Give you answer as a decimal to four decimal places.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc0eba744-2ca5-4b9b-b356-631e195ec79e%2F1b9853b3-2653-4762-b58c-e9912c693da2%2Fby35i7q_processed.png&w=3840&q=75)
Transcribed Image Text:An investor makes decisions using quadratic utility U = E[r] - Ao² with a
risk-aversion coefficient of 6. They have found a "baseline" asset with an expected
return of 0.11 and standard deviation of 0.21. They are also considering investing
in an "alternate" asset with a standard deviation of 0.41. What expect return does
this "alternate" asset need to provide to make the investor indifferent between it
and the "baseline" asset? Give you answer as a decimal to four decimal places.
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