Question
In: Finance
Assume a stock market with only two assests: one risky, one risk-free. Assume two investors who...
Assume a stock market with only two assests: one risky, one risk-free.
Assume two investors who are identical, except for their degree of risk aversion. (Same wealth, same investment horizon, etc.)
Investor A has a degree of risk aversion of 1.5, while investor B has a degree of risk aversion of 5.
Describe how their investment portfolio will differ?
Solutions
Expert Solution
Answer : Degree of Risk Aversion means additional marginal Return in terms of risk to be taken by the investor.If the investor has Degree of Aversion of 5 , then portfolio the investor will have less risky portfolio so his investment portfolio will consists more of Risk free Asset then the risky stocks. However on the other hand if an Investor has Degree of Risk Aversion of 1.5 then he is less risk risk averse means he he ready to take risk for return so his /her portfolio will consist of more risky stock than risk free stocks.
jeff jeffy answered 2 years agoRelated Solutions
Assume a stock market with only two assets: one risky, one risk-free. Assume two investors who...
Assume a stock market with only two assets: one risky, one
risk-free.
Assume two investors who are identical, except for their degree
of risk aversion. (Same wealth, same investment horizon, etc.)
Investor A has a degree of risk aversion of 1.5, while investor
B has a degree of risk aversion of 5.
Describe how their investment portfolio will differ
Suppose we have two risky assets, Stock I and Stock J, and a risk-free asset. Stock...
Suppose we have two risky assets,
Stock I and Stock J, and a risk-free asset. Stock I has an expected
return of 25% and a beta of 1.5. Stock J has an expected return of
20% and a beta of 0.8. The risk-free asset’s return is 5%.
a. Calculate the expected returns and
betas on portfolios with x% invested in Stock I and the rest
invested in the risk-free asset, where x% = 0%, 50%, 100%, and
150%.
b. ...
4. Suppose we have two risky assets, Stock I and Stock J, and a risk-free...
4. Suppose we
have two risky assets, Stock I and Stock J, and a risk-free asset.
Stock I has an expected return of 25% and a beta of 1.5. Stock J
has an expected return of 20% and a beta of 0.8. The risk-free
asset’s return is 5%.
a. Calculate the expected returns and
betas on portfolios with x% invested in Stock I and the rest
invested in the risk-free asset, where x% = 0%, 50%, 100%, and...
4. Suppose we have two risky assets, Stock I and Stock J, and a risk-free...
4. Suppose we
have two risky assets, Stock I and Stock J, and a risk-free asset.
Stock I has an expected return of 25% and a beta of 1.5. Stock J
has an expected return of 20% and a beta of 0.8. The risk-free
asset’s return is 5%.
a. Calculate the expected returns and
betas on portfolios with x% invested in Stock I and the rest
invested in the risk-free asset, where x% = 0%, 50%, 100%, and...
We have only two risky assets in the market with the following risk and return: Expected...
We have only two risky assets in the market with the following
risk and return:
Expected Return
Standard Deviation
Stocks
20%
25%
Bonds
15%
15%
The correlation between the two risky assets is: 0.5 and the
risk free in the market is 8%.
Find the weight of Stocks and Bonds in the optimal portfolio.
Calculate the return and standard deviation of the optimal
portfolio.
Calculate the standard deviation of portfolio (P) with
an expected return of 15% on the CAL....
We have only two risky assets in the market with the following risk and return: Expected...
We have only two risky assets in the market with the following
risk and return:
Expected Return
Standard Deviation
Stocks
20%
25%
Bonds
15%
15%
The correlation between the two risky assets is: 0.5 and the
risk free in the market is 8%.
Find the weight of Stocks and Bonds in the optimal portfolio.
Calculate the return and standard deviation of the optimal
portfolio.
Calculate the standard deviation of portfolio (P) with
an expected return of 15% on the CAL....
7) There are only two securities (A and B, no risk free asset) in the market....
7) There are only two securities (A
and B, no risk free asset) in the market. Expected returns and
standard deviations are as follows:
Security
Expected return
standard Deviation
Stock A
25%
20%
Stock B
15%
25%
The correlation between stocks A and B is 0.8. Compute the
expected return and standard deviation of a portfolio that has 0%
of A, 10% of A, 20% of A, etc, until 100% of A. Plot the portfolio
frontier formed by these portfolios...
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one risk-free asset. The risky asset has an expected return of 20%
and a variance of 16%. The T-bill rate (that is the risk-free rate)
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If Mary wants to find a general equation for
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1. Suppose we have one risky asset Stock I and a risk-free asset. Stock I has...
1. Suppose we have one risky
asset Stock I and a risk-free asset. Stock I has an expected return
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(15 marks total)
a. Calculate the
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b. What
reward-to-risk ratio does Stock...
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