Question

1. The risk premium is _____.

Check all that apply:

the reward for bearing risk

the difference between the expected rate of return on an asset and the risk-free rate

normally zero for risky assets

normally positive for risky assets

2. An investor wants to invest money in Treasury bills and a risky fund managed by Infinity Capital. The investor wants to achieve an expected return of 10% on his complete portfolio. Infinity Capital has an expected return of 9% and a standard deviation of returns of 14%. T-bills have a return of 3%.

a. What proportion of his total investment should he invest in the T-bills in order to achieve the expected return?

b. What is the standard deviation of the complete portfolio?

3. An investor wants to invest money in Treasury bills and a risky fund managed by Infinity Capital. The investor wants to achieve an expected return of 10% on his complete portfolio. Infinity Capital has an expected return of 9% and a standard deviation of returns of 14%. T-bills have a return of 3%.

a. What proportion of his total investment should he invest in the T-bills in order to achieve the expected return?

b. What is the standard deviation of the complete portfolio?

4. You've recorded the following historical annual returns for a stock:

Year	Return
1	8%
2	2%
3	-14%
4	3%
5	7%

a. What was the expected standard deviation of returns?

Answer 1

1 The risk premium is the reward for bearing risk the difference between the expected rate of return on an asset and the risk-free rate normally positive for risky assets 2 weight Risk -16.67% 16.33% 12 weight Risk -16.67% 16.33% 16 17 18 19 4 Year 8% 2% 14% 3% 796 0.46% 0.01% 2.31% 0.03% 0.34% 2 1.20% 8.87% 23 Average SD

1 The risk premium is the reward for bearing risk the difference between the expected rate of return on an asset and the risk-free rate normally positive for risky assets 2 weight Risk -16.67% 16.33% 12 weight Risk -16.67% 16.33% 16 17 18 19 4 Year 8% 2% 14% 3% 796 0.46% 0.01% 2.31% 0.03% 0.34% 2 1.20% 8.87% 23 Average SD