FF Qs & As Topic 5 Part 1 - FEEDBACK FORUM TOPIC 5...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: FEEDBACK FORUM TOPIC 5 RISK AND RETURN PART 1 Question 1 The return and associated probabilities of two assets in each of 3 possible states is given below. The probabilities are of each state occurring. State I II III Asset A 10% 7% 6% B 5% 8% 9% Probability: 25% 50% 25% The return and variance of assets A and B are: A) Ra= 7.5; Rb = 7.5; Var A = 1.5; Var B = 1.5 B) Ra= 7.5; Rb = 7.5; Var A = 2.25; Var B = 2.25. C) Ra= 7; Rb = 7.5; Var A = 2.25; Var B = 2.25. D) none of the above ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 n n i PR R PR R PR R R + + + = ..... 2 2 1 1 ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 % 5 . 7 075 . 015 . 035 . 025 . 25 . 06 . 50 . 07 . 25 . 10 . = = + + = + + = A R ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 % 5 . 7 075 . 0225 . 04 . 0125 . 25 . 09 . 50 . 08 . 25 . 05 . = = + + = + + = B R ( 29 ( 29 i i i i PR R R Var 2- = ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 25 . 075 . 06 . 50 . 075 . 07 . 25 . 075 . 10 . 2 2 2- +- +- = A Var = 0.00015625+0.0000125+0.00005625 = 0.000225 = 0.0225% ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 25 . 075 . 09 . 50 . 075 . 08 . 25 . 075 . 05 . 2 2 2- +- +- = B Var = 0.00015625+0.0000125+0.00005625 = 0.000225 = 0.0225% 1 Question 2 The return and associated probabilities of two assets in each of 3 possible states is given below. The probabilities are of each state occurring. State I II III Asset A 10% 7% 6% B 5% 8% 9% Probability: 25% 50% 25% Which asset would a risk averse investor choose? A) asset A B) asset B C) indifferent between A and B D) depends upon the investor's degree of risk aversion % 15 . %, 0225 . %, 5 . 7 %, 15 . %, 0225 . %, 5 . 7 = = = = = = B B B A A A Var R Var R A risk-averse investor will only accept higher risk if there is the possibility of a higher return (risk-return trade-off). And a rational, risk-averse investor will aim for the highest return for a given level of risk, or lowest risk for a given return. Therefore, since the expected return for both Asset A and Asset B is the same and they have the same variance and standard deviation, a rational, risk-averse investor would be indifferent between the two assets. 2 Question 3 A risk-averse investor is faced with a selection between Asset A with a standard deviation of 20% and an expected return of 15%, and Asset B with a standard deviation of 25% and an expected return of 20%. Which asset would the investor prefer? A) Asset A B) Asset B C) depends upon the investor's level of risk aversion D) indifferent between A and B % 25 %, 20 %, 20 %, 15 = = = = B B A A R R Asset B has a higher expected return and...
View Full Document

Page1 / 9

FF Qs & As Topic 5 Part 1 - FEEDBACK FORUM TOPIC 5...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online