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 ago
Next > < Previous

Related 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...
Q1) You have a portfolio of one risky asset and one risk-free asset. The risky asset...
Q1) You have a portfolio of one risky asset and 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) is 6%. Your client Mary is thinking of investing 75% of her portfolio in the risky asset and the remaining in a T-bill. If Mary wants to find a general equation for the expected return and risk of her portfolio what are the equations that...
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 of 25% and a beta of 2. The risk-free asset’s return is 6%.                                                                                                                                      (15 marks total) 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%, 25%, 75%, 100%, 125%, and 150%.                                                                        b.   What reward-to-risk ratio does Stock...
According to the CAPM, a stock is twice as risky as the market portfolio The expected return of the market portfolio is 12 and the risk free rate is 6
Accordingto the CAPM, a stock is twice as risky as the market portfolio Theexpected return of the market portfolio is 12 and the risk free rate is 6 Thestock’s price is currently 10 An analyst predicts that the price will be 11 in oneyear According to the analyst, where does this stock plot relative to the SML? Ifthe analyst’s forecast is correct, then by what percentage would the stock’s pricehave to change today in order for it to plot on...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT