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65.
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard
deviation of 0.21 and a T-bill with a rate of return of 0.045.
The slope of the capital allocation line formed with the risky asset and the risk-free
asset is equal to
Short Answer Questions
66.
Discuss the differences between investors who are risk averse, risk neutral, and risk
loving.
67.
In the utility function:
U
=
E
(
r
) – [-0.005
As
2], what is the significance of “
A
“?
68.
What is a fair game? Explain how the term relates to a risk-averse investor’s attitude
toward speculation and risk and how the utility function reflects this attitude.
69.
Draw graphs that represent indifference curves for the following investors: Harry, who
is a risk-averse investor; Eddie, who is a risk-neutral investor; and Ozzie, who is a risk-
loving investor. Discuss the nature of each curve and the reasons for its shape.
70.
Toby and Hannah are two risk-averse investors. Toby is more risk-averse than
Hannah. Draw one indifference curve for Toby and one indifference curve for Hannah
on the same graph. Show how these curves illustrate their relative levels of risk
aversion.
71.
Discuss the characteristics of indifference curves, and the theoretical value of these
curves in the portfolio building process.
72.
Describe how an investor may combine a risk-free asset and one risky asset in order to
obtain the optimal portfolio for that investor.
73.
The optimal proportion of the risky asset in the complete portfolio is given by the
equation
y
* = [
E
(
rP
) –
rf
]/(.01
A
times the variance of
P
). For each of the variables on
the right side of the equation, discuss the impact of the variable’s effect on
y
* and why
the nature of the relationship makes sense intuitively. Assume the investor is risk
averse.
74.
You are evaluating two investment alternatives. One is a passive market portfolio with
an expected return of 10% and a standard deviation of 16%. The other is a fund that is
actively managed by your broker. This fund has an expected return of 15% and a
standard deviation of 20%. The risk-free rate is currently 7%. Answer the questions
below based on this information.