The following table shows the betas and actual expected returns of 4 mutual funds in the market: Beta ● Fund 1 Fund 2 Fund 3 Fund 4 The return rate of riskfree asset is rf = 5% and the market portfolio exists. You are given that • Exactly two of the funds perform better than the market expectation (i.e. Actual expected return is strictly higher than market expected return) Exactly one of the funds performs worse than the market expectation. (a) Which of the funds lie on security market line (SML)? Explain your answer. (Hint 1: Try to draw a suitable figure and visualize the problem.) (Hint 2: Which performance indexes will be useful in this context?) Actual expected return 7.2% 10% 12% 16% 0.5 0.8 1.4 1.9

The following table shows the betas and actual expected returns of 4 mutual funds in the market: Beta ● Fund 1 Fund 2 Fund 3 Fund 4 The return rate of riskfree asset is rf = 5% and the market portfolio exists. You are given that • Exactly two of the funds perform better than the market expectation (i.e. Actual expected return is strictly higher than market expected return) Exactly one of the funds performs worse than the market expectation. (a) Which of the funds lie on security market line (SML)? Explain your answer. (Hint 1: Try to draw a suitable figure and visualize the problem.) (Hint 2: Which performance indexes will be useful in this context?) Actual expected return 7.2% 10% 12% 16% 0.5 0.8 1.4 1.9

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter2: Fundamental Economic Concepts

Section: Chapter Questions

Problem 6E

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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?
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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. Calculate relative risk aversion for this investor. How does relative risk aversion depend on wealth?
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Need qualitiey answer Define a rational risk aversive investor.
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…