Question
In Exhibit below, the risk and return of the points marked are as follows: Point Return Risk A 15% 10% B 11% 10% C 15%
In Exhibit below, the risk and return of the points marked are as follows:
Point Return Risk
A 15% 10%
B 11% 10%
C 15% 30%
D 25% 30%
F 4% 0%
P 16% 17%
G (gold) 10% 30%
Exhibit
Answer the following questions with reference to the points plotted on Exhibit, and briefly explain your answer.
Which of these portfolios is most suitable for a risk neutral investor? Why?
Which investor is more risk averse? The one who holds portfolio B as his complete optimal portfolio or the one who holds portfolio P? Briefly explain.
Which risky portfolio will be held by all rational investors regardless of their risk-aversion? Why?
Point A has higher expected return than point B. Why would a portfolio manager recommend point B to his clients?
Point D is superior to point C, because it has higher expected return for the same risk level. Point P is superior to C, because it has less risk with slightly higher expected return. Therefore, no rational investor would want to hold portfolio C? Do you agree or disagree with this statement? Why?
There is an investor X who is indifferent between portfolio P and portfolio D, based on his utility function, U = E(r) 0.5A2. What must be his risk-aversion coefficient? Will X choose portfolio P, portfolio D, or some other portfolio? Explain why if you choose P or D. If you state some other portfolio, explain the position of that portfolio on the CAL as best as you can.
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