Option Payoff One Year from Now 100% chance of receiving $1,100 2 50% chance of receiving $1,000 50% chance of receiving $1,200 3 50% chance of receiving $200 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. 0 The investor will choose option 2. 0 The investor will choose option 3. The investor will be indifferent toward these options. In contrast to his brother Erik, Devin is a risk lover (or exhibits risk seeking behavior). Which of the following statements is true about Devin? O Everything else remaining constant, Devin will prefer option 3. O Everything else remaining constant, Devin will prefer option 1. 0 Everything else remaining constant, Devin will prefer option 2. None of the above. A financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standard deviation? A portfolio with 10 randomly selected U.S. stocks A portfolio with 10 randomly selected international stocks A portfolio with 10 randomly selected stocks from U.S. and international markets Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several other factors. One key consideration is each stocks contribution to portfolio risk and its statistical relationship with the portfolio's other stocks. Based on your understanding of portfolio risk, identify whether each statement is true or false. Statement True False The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio. A portfolio's risk is not equal to the weighted average of the individual stocks standard deviations. When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated. The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio