24 - As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation? It increases at a decreasing rate. It first decreases, then starts to increase as more securities are added. It decreases at an increasing rate. It increases at an increasing rate. a) b) c) d) e) It decreases at a decreasing rate.
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- 8. Risk and return Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A BUDW C E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.50 7.50 11.50 15.50 19.50 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 Sell some of her stocks and place the proceeds in a savings account O Sell some of her bonds and use the proceeds to purchase stocks Accept more risk Sell some of her stocks and use the proceeds to purchase bonds 15 20 As the risk of Caroline's portfolio increases, the average annual return on her portfolio Suppose Caroline currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the…1. Which of the following is INCORRECT? a All of a stock's risk could be unsystematic. b. A negative beta stock has an expected return less than the risk-free rate. c. Anticipated returns on any given stock are always greater than 0. d. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). 2. Which of the following measures the total risk of a portfolio? a. Beta b. Standard Deviation c. Correlation Coefficient d. Alpha 3. Which of the following stocks have the highest systematic risk? a A stock with high correlation to the market and high returm volatility. b. A stock with low correlation to the market and a high return volatility. c A stock with high correlation to the market and a low return volatility. d. A stock with low correlation to the market and a low return volatility. 4. Which of the following companics have the lowest systematic risk? a A company that sells soups (Campbells), beta=0.60 b. A coffee company…Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds.CombinationFraction of Portfolio in Diversified StocksAverage Annual ReturnStandard Deviation of Portfolio Return (Risk)(Percent)(Percent)(Percent)A 0 1.50 0B 25 3.00 5C 50 4.50 10D 75 6.00 15E 100 7.50 20There is a relationship between the risk of Caroline's portfolio and its average annual return.Suppose Caroline currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase…
- 6- Suppose Firm B is selling 1 -year insurance contracts for houses. Suppose Firm B's customers are divided into three categories with different probabilities of needing a payment. First category will ask for a payment of 500000 with probability 0.10, the second category will ask for a payment of 250000 with probability 0.15 and the third category will ask for a payment of 100000 with probability 0.2 a. Calculate Firm B's expected payment for the year. Suppose Firm B has 120 customers in the first category, 230 in the second category and 405 in the third category. b. Calculate individual premium if Firm B charges the same amount to all its customers. 1 c. Calculate individual premium if Firm B utilizes the risk groups and charges the same amount of premium within groups d. Which group/groups are more likely to buy the insurance with group pricing compared to the case with uniform pricing?According to modern portfolio theory, the idea that investors with different indifference curves will hold the same portfolio of risky securities is a result of O a. the separation theorem O b covariance O c. the normal distribution assumption O d. diminishing marginal utility of income8. Risk and return Suppose Valerie is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Fraction of Portfolio in Diversified Average Annual Standard Deviation of Portfolio Return Stocks Return (Risk) Combination (Percent) (Percent) (Percent) 1.00 B 25 2.00 5. 50 3.00 10 75 4.00 15 100 5.00 20 If Valerie reduces her portfolio's exposure to risk by opting for a smaller share of stocks, she must also accept a average annual return. Suppose Valerie currently allocates 25% of her portfollo to a diversined group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the average annual return on her portfolio from 2% to 4%. In order to do so, she must do which of the following? Check all that apply. O Sell some of her stocks and place the proceeds…
- 19 - Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and 0.4 on the second factor, what is its expected return? a) 8.0% b) 13.2% 12.0% d) 7.0% o1383176 9.2%5. You have been hired as a portfolio manager for a fancy hedge fund. Your first job is to invest $100,000 in a portfolio of two assets. The first asset is a safe asset with a certain return of 5%. The second asset is shares of a dying video-game store that has become popular with retail investors, it has a 20% expected rate of return, but the standard deviation of this return is 10%. Your manager wants a portfolio with as high a rate of return as possible while keeping the standard deviation at or below 4%. How much of the fund's money do you invest in the safe asset?5. Investor attitudes toward risk Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000; 50% chance of receiving $1,200 3 50% chance of receiving $200; 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. Suppose the market risk premium is currently 6%. If investors were to become more risk-averse, the market risk premium might increase to 8%. What effect would you expect this to have on the prices of most financial assets? Prices would be unaffected. Prices would decrease. Prices would increase.
- 3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?15. If a financial institution has a portfolio that half (50%) consists of bonds with a tenor of five years and the other half is in the form of bonds with a duration of seven years, what is the duration/tenor of the financial institution's portfolio? A) 12 years B) 7 years C) 6 years D) 5 years 16. If the corporation/company begins to experience large losses, the default risk on the company's bonds will be A) increases and the uncertainty of bond returns increases, meaning that the expected return on the company's bonds will decrease. B) increases and the uncertainty of bond returns decreases, which means the expected return on the company's bonds will decrease. C) decreases and the uncertainty of bond returns decreases, which means the expected return of the company's bonds will decrease. D) decreases and the uncertainty of bond returns decreases, which means the expected return of the company's bonds will increase.QUESTION 2 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient of correlation increases. The standard deviation of the portfolio returns decreases as the coefficient of correlation increases. The standard deviation of the portfolio returns increases as the coefficient of correlation decreases.