Ted believes that he currently owns a portfolio which is adequately diversified. If he is correct, the addition of aa. risky; rate of return b. risky; beta c. risk-free; beta d. risky; standard deviation e. risk - free; rate of returnasset to the portfolio will have minimal, if any, effect on the portfolio's

The answer is: d. risky; standard deviationHere's why:Risky asset:By definition, adding a risky…

Answered: Ted believes that he currently owns a…

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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Which of the following statements regarding non-systematic risk, systematic risk and total risk is/are true? Select one or more:a. As the number of assets within a portfolio increases, the total risk of a portfolio will go to zero.b. A riskfree asset must have zero non-systematic risk.c. A well diversified portfolio must have zero systematic riskd. Under the Capital Asset Pricing Model (CAPM).an asset with zero systematic risk must have expected return equal to the riskfree rate.
Which of the following statements is correct concerning a mean-variance efficient portfolio of risky assets in a world where there is also a risk-free asset? OA. It will be impossible to form a different portfolio yielding a lower level of risk unless the portfolio also earns a lower return, O B. Risk averse investors will only choose to invest in the market portfolio (M) regardless of the risk-free rate. OC. The portfolio will always achieve the maximum possible returns. O D. The portfolio will always be inside the feasible set.
An investor must look not only at the over-all return of a portfolio but also the risk of that portfolio to see if the investments return compensates for the risk it takes a. it depends b. maybe c. true d.false
Answer whether each of the following statements is correct and explain your argument. \ (a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.
Under the CAPM, all investors form portfolios of two assets, a risk-free asset and a risky portfolio M, regardless of their level of wealth Y. If an investor becomes wealthier, he may want to increase or decrease the proportion of his wealth held in the risky portfolio, and, by the Cass-Stiglitz Theorem, unless his preferences have a very specific form, as his wealth changes, he will want to alter the composition of the risky part of his portfolio. The CAPM does not assume such preference restrictions. Yet, the CAPM equilibrium does not seem to permit the desired changes in the composition of the agent's risky portfolio! Is there a contradiction?
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.
Which of the following statements is correct? A delta-neutral portfolio is protected against large changes in the underlying asset price. The delta hedging error increases as gamma decreases. To change the vega of a portfolio, we need to trade the portfolio’s underlying asset. A delta-neutral portfolio needs to be rebalanced more frequently as the gamma increases to maintain delta-neutrality. Please explain and justify your choice using your own words.
Portfolio theory tends to define risky investments in terms of just two factors: expectedreturns and variance (or standard deviation) of those expected returns. What assumptions need to be made about investors and the expected investment returns (one assumption in each case) to justify this ‘two-factor’ approach? Are these assumptions justified in real life?
Indicate whether its True or False. Then write the explanation! In the presence of diversification benefits, when we combine two assets together into a portfolio, the systematic risk of the portfolio will be less than the weighted average systematic risk of the individual assets in the portfolio.
When a portfolio consists of only a risky asset and a risk-free asset, increasing the fraction of the overall portfolio invested in the risky asset will a. Increase the expected return and standard deviation of the portfolio b. Increase the standard deviation of the portfolio c. Decrease the standard deviation of the portfolio d. Increase the expected return of the portfolio
Which one of the following is a property of a pure arbitrage portfolio?a. Negative investment.b. Zero return.c. Positive systematic risk.d. Zero total risk.
If a portfolio has a positive investment in every asset, can the standard deviation of the portfolio be less than sum of the individual asset's standard deviations in the portfolio? Explain

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