Which ones of the following statements about portfolio beta are correct? O 1. If portfolio beta is between 0 and 1, then the portfolio expected return is between risk-free rate and the market expected return. O 2. If the return of an asset has zero correlation with the market portfolio returns, the beta of this asset must be zero. O 3. A portfolio that has the same portfolio weights as the market portfolio should have a beta of 1. 04. Diversification is not a way to reduce portfolio beta. O 5. If two portfolios have the same portfolio weights, but different dollar values, their betas are the same.

Which ones of the following statements about portfolio beta are correct? O 1. If portfolio beta is between 0 and 1, then the portfolio expected return is between risk-free rate and the market expected return. O 2. If the return of an asset has zero correlation with the market portfolio returns, the beta of this asset must be zero. O 3. A portfolio that has the same portfolio weights as the market portfolio should have a beta of 1. 04. Diversification is not a way to reduce portfolio beta. O 5. If two portfolios have the same portfolio weights, but different dollar values, their betas are the same.

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

See similar textbooks

Similar questions

(Portfolio VaR) Suppose there are two investments A and B. Either investment A or B has a 4.5% chance of a loss of $15 million, a 2% chance of a loss of $2 million, and a 93.5% change of a profit of $2 million. The outcomes of these two investments are independent of each other.
ich of the following will not reduce risk in a portfolio? Select one: a. Selecting two securities that are perfectly positively correlated. b. Selecting two securities that are positively correlated. c. Selecting two securities that are perfectly negatively correlated. d. Selecting two securities that are negatively correlated.
According to the Capital Asset Pricing Model (CAPM), an asset with negative beta: a. Cannot exist b. Is expected to earn a negative return c. Should be short sold d. Will not be included in the market portfolio e. None of the above
Consider a risky portfolio, A, with an expected rate of return of 0.16 and a standard deviation of 0.25, that lies on a given indifference curve. Which one of the following portfolios is not likely to lie on the same indifference curve for a risk-averse investor with a mean- variance utility function? a. Expected return = 0.20; Standard deviation = 0.15 b. Expected return = 0.10; Standard deviation = 0.20 Expected return= 0.15; Standard deviation = 0.20 Expected return = 0.12; Standard deviation = 0.10 Expected return = 0.10; Standard deviation = 0.10 C. d. e.
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.
Consider an economy with a (net) risk-free return r1 = 0:1 and a market portfolio with normally distributed return, with ErM = 0:2 and 2M = 0:02. Suppose investor A has CARA preferences, with risk aversion coe¢ cient equal to 1 and an endowment of 10. a) Write down the maximization problem for the investor. b) Determine the amount invested in the risky portfolio and in the risk-free asset. c) Suppose another investor (B) has a coe¢ cient of absolute risk aversion equal to 2 (and the same endowment 10). Compute his optimal portfolio and compare it to that of investor A. Explain the di§erent results for investors A and B. d) Finally, consider Investor C with mean-variance preferences Ec V ar(c) (and endowment 10). Compute his optimal portfolio and compare it to that of investors A and B (as obtained in questions b and c). Compare your result with those obtained for investors A and B.
The portfolio with the highest Sharpe Ratio is I. The minimum-variance point on the efficient frontier II. The tangency point of the capital market line and the efficient frontier III. The maximum-return point on the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier Select one: a. II and IV only b. I and IV only c. III and IV only d. Only IV e. I and II only
You have developed the following data to examine the impact of portfolio diversification. Which scenario seems to be out of place? # of stocks in the portfolio Diversifiable Risk Market Risk L. 2 stocks M. 20 stocks N. 30 stocks O. 60 stocks P. 100 stocks ΟΝ OL O M P 0.15 0.07 0.11 0.08 0.06 0.20 0.20 0.20 0.20 0.20
Assume that the CAPM assumptions hold. Consider the following statements:i. A stock with a beta below zero will tend to move in the same direction as the market but will tend to move less aggressively in that direction than the market does.ii. Alpha measures the additional risk we take on top of the risk of the market portfolio.
We believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?
ANSWER C AND D PLEASE ONLY Consider the following portfolio choice problem. The investor has initial wealth w andutility u(x) = (x^n) / n. There is a safe asset (such as a US government bond) that has netreal return of zero. There is also a risky asset with a random net return that has onlytwo possible returns, R1 with probability 1 − q and R0 with probability q. We assumeR1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A isinvested in the safe asset.a) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving?b) Find A as a function of w. c) Does the investor put more or less of his portfolio into the risky assetas his wealth increases? d) Now find the share of wealth, α, invested in the risky asset. How doesα change with wealth?
Construct a plausible graph that shows risk (asmeasured by portfolio standard deviation) on thex-axis and expected rate of return on the y-axis.Now add an illustrative feasible (or attainable) setof portfolios and show what portion of the feasibleset is efficient. What makes a particular portfolioefficient? Don’t worry about specific values whenconstructing the graph—merely illustrate howthings look with “reasonable” data

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS