Portfolio A has an expected return of 15% and a Sharpe ratio of 0.42. Portfolio B has an expected return of 20% and a Sharpe ratio of 0.37. Portfolio C has an expected return of 25% and a Sharpe ratio of 0.31. Among A, B, and C, rational risk-averse investors prefer to include which one into her complete portfolio? O There is not enough information to choose among A, B, C. O Portfolio B O Portfolio C O Portfolio A
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- The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45Given the indifference curves above, which of the following statements isCORRECT? A) The investor prefers portfolio A because it has a lower level of risk. B) The investor prefers portfolio B because it has the greatest expected return. C) The investor prefers portfolio E because it is on the indifference curve 2, which is higher than the indifference curve 1, where both portfolios A and B are situated. D) The investor does not prefer one portfolio from another as each portfolio lies on an indifferent curve.The optimal proportion of the risky asset in the complete portfolio is given by the equation below y*= E(Rp− Rf) A0² For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse
- 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.Which two portfolios lie on the same indifference curve? Ignore feasibility. Expected Return, E(r) OH and G OH and F O F and E 0 2 4 3 H O G and E O No two portfolios lie on the same indifference curve G 4 3 N E Capital Allocation Line (CAL) Risk, oConstruct 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
- (a) Determine the expected return of security X (b) To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio’s systematic risk? How would portfolio expected return change (higher or lower) if you add this security?2. Based on the chart above, which portfolio is “better” based on Markowitz approach to portfolio construction? A. A, because it has zero risk B. B, because it is safe than C C. C, because it has higher return D. B & C are equally good because both have same “return relative to the risk taken” and the choice between the two is a matter of investors preferenceAn 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
- 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. O 4. 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 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.For a risk-averse investor, which of the following portfolios would be preferred? Portfolio B, with a Sharpe Ratio of 3. Portfolio A, with a Sharpe Ratio of 4. Portfolio D, with a Sharpe Ratio of 1. Portfolio C, with a Sharpe Ratio of 2.