Conceptual Questions-1 (10 points) Choose TRUE/FALSE for the statements below from A to C. Make your selection clear and distinct, otherwise you will not get credit. Let an investor be considering two risky portfolios: A and B to construct a complete portfolio C with a risk-free asset. The reward-to-variability ratio of portfolio A is 0.12 and reward to variability ratio of portfolio B is 0.14. Choose TRUE/FALSE for the following statements. A. Higher reward-to-variability ratio of portfolio B implies that its capital allocation line has a lower slope than that for the capital allocation line for A. (4 points) (TRUE/FALSE) (4 points) B. CAL(A) will plot above CAL(B) (TRUE/FALSE) C. Combination of portfolio A and risk-free asset will provide higher expected return for any level of risk than combination of portfolio B and risk-free asset. (2 points) (TRUE/FALSE) Conceptual Questions-2 (10 points) Kamla is considering investing in two risky portfolios ABC and XYZ. She is an extremely risk averse investor and wants to invest in one risky-portfolio OR both risky-portfolios. A. If she decides to construct a complete portfolio by choosing both risky portfolios, what is the best portfolio for Kamala given her risk attitude? (4 points) a. Risky portfolio ABC b. Minimum-variance portfolio c. Optimal risky portfolio B. Once she has selected just one risky portfolio, what factor / characteristic will explain her allocation of wealth between the risky portfolio and risk-free asset in the complete portfolio? Why? [Hint: Use a graph to reflect on what you will explain in words] (6 points) ABC 1. Kamla is considering investing in two risky portfolios ABC and XYZ. She is an extremely risk averse investor and wants to invest in one risky-portfolio OR both risky- portfolios. A. If she decides to construct a complete portfolio by choosing both risky portfolios, what is the best portfolio for Kamala given her risk attitude? a. Risky portfolio ABC b. Minimum-variance portfolio c. Optimal risky portfolio B. Once she has selected just one risky portfolio, what factor / characteristic will explain her allocation of wealth between the risky portfolio and risk-free asset in the complete portfolio? Why? [Hint: Use a graph to reflect on what you will explain in words] | Conceptual Questions-1 (10 points) Choose TRUE/FALSE for the statements below from A to C. Make your selection clear and distinct, otherwise you will not get credit. Let an investor be considering two risky portfolios: A and B to construct a complete portfolio C with a risk-free asset. The reward-to-variability ratio of portfolio A is 0.12 and reward to variability ratio of portfolio B is 0.14. Choose TRUE/FALSE for the following statements. A. Higher reward-to-variability ratio of portfolio B implies that its capital allocation line has a lower slope than that for the capital allocation line for A. (4 points) (TRUE/FALSE) (4 points) B. CAL(A) will plot above CAL(B) (TRUE/FALSE) C. Combination of portfolio A and risk-free asset will provide higher expected return for any level of risk than combination of portfolio B and risk-free asset. (2 points) (TRUE/FALSE) Conceptual Questions-2 (10 points) Kamla is considering investing in two risky portfolios ABC and XYZ. She is an extremely risk averse investor and wants to invest in one risky-portfolio OR both risky-portfolios. A. If she decides to construct a complete portfolio by choosing both risky portfolios, what is the best portfolio for Kamala given her risk attitude? (4 points) a. Risky portfolio ABC b. Minimum-variance portfolio c. Optimal risky portfolio B. Once she has selected just one risky portfolio, what factor / characteristic will explain her allocation of wealth between the risky portfolio and risk-free asset in the complete portfolio? Why? [Hint: Use a graph to reflect on what you will explain in words] (6 points) ABC 1. Kamla is considering investing in two risky portfolios ABC and XYZ. She is an extremely risk averse investor and wants to invest in one risky-portfolio OR both risky- portfolios. A. If she decides to construct a complete portfolio by choosing both risky portfolios, what is the best portfolio for Kamala given her risk attitude? a. Risky portfolio ABC b. Minimum-variance portfolio c. Optimal risky portfolio B. Once she has selected just one risky portfolio, what factor / characteristic will explain her allocation of wealth between the risky portfolio and risk-free asset in the complete portfolio? Why? [Hint: Use a graph to reflect on what you will explain in words] |