If investors want portfolios with small risk, should they look for investments that have positive covariance, have negative covariance, or are uncorrelated? Does a portfolio formed from the mix of three investments have more risk than a portfolio formed from two
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If investors want portfolios with small risk, should they look for investments that have positive covariance, have negative covariance, or are uncorrelated?
Does a portfolio formed from the mix of three investments have more risk than a portfolio formed from two?
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Solved in 4 steps
- Why does the risk-adjusted discount rate reduce the investment's appeal?What is covariance, and why is it important in portfolio theory?Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment To maximize your expected return, you should choose: Stocks Bonds Probability Return Probability Return 0.15 20% 0.15 16.7% 06 10% T 04 7.5% 0.25 8% 0.45 3.3% OA bonds OB stocks OC. commodities OD. All of the portfolios have the same expected return. If you are risk-averse and had to choose between the stock or the bond investments, you would choose OA the stock portfolio because there is less uncertainty over the outcome OB. the bond portfolio because there is less uncertainty over the outcome. OC. the stock portfolio because of greater expected return. OD. the bond portfolio because of greater expected return. Commodities Probability Return 02 20% 0.2 15% 0.2 8% 02 02 5% 0%
- What is the expected return from an investment if there is a 20 percent chance of a 4 percent return, a 40 percent chance of a 8 percent return, and a 40 percent chance of a 12 percent returnWhich of the following describes the attribute of a risk neutral investor? Select one: a. An investor that makes decisions based on the advice of financial planners. b. An investor that makes decisions based on the expected return of assets. C. An investor that makes decisions based on the credit rating of assets.Economics Fenner Smith from Workouts 13.2 is an investor who has preferences for risk o and returnu given by the utility function u = min (µ, 4 –0). He plans to invest $40,000. The market rate of return is 8 percent and the risk-free rate of return is 2 percent. The risk on the market portfolio is 2 percent. a. How much of his $40,000 will a utility maximizing investor hold in the market portfolio? Show this as Bundle A in your diagram. b. The market return rises to 16 percent.How much of his $40,000 will he hold in the market portfolio. Show this as Bundle C in your diagram. c. Calculate the Hicksian ČV for this change. Show this in your diagram as Bundle B.
- Why are investors’ utility curves important in portfolio theory?Suppose you are considering buying $5,000 worth of Canada savings bonds (risk-free) and a portfolio of perfectly risk- balanced stocks so that the portfolio is also "risk-free". The stocks portfolio is "risk-free" because it has some stocks that rise in value during a recession (such as McDonald's, chocolate bars, etc.) and some stocks that fall in value during a recession (Samsung, Tesla, etc.) Both choices offer to pay a 5% annual return. However, you also know that 100% of interest income from bonds is taxed as regular income while only 50% of stock income is taxed as regular income. The discount rate you use to evaluate the stocks portfolio should be a. Equal to 5% b. Higher than 5% c. Lower than 5% d. Equal to your income tax rate.A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio: A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. B. The expected return on the stock market increases, but the standard deviation of the stock market remains the same. C. The return on risk-free Treasury bills increases.
- How would you describe the relationship between a risky investment and the return on that investment (think stocks or retirement accounts)? a casual or limited relationship there is no relationship between the level of risk and the return you get on your investment a direct or positively correlated relationship an inverse or negatively correlated relationshipWhich statement is true? Always select a portfolio on a person's highest indifference curve, to achieve maximum attainable utility & To achieve the highest utility, select the portfolio where the highest attainable indifference curve is tangential to the efficiency frontier To achieve the highest utility, first choose the best efficiency frontier and then select the highest returns portfolio To achieve the highest utility, select the portfolio where the highest attainable indifference curve is tangential to the efficiency frontier Always select a portfolio on a person's highest indifference rurve, to achieve maximum attainable utility ke Select the portfolio with the lowest risk to achieve maximum utilityAs an investor, how do you diversify against risk?
