This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full 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 σ σ A riskaverse investor will only accept higher risk if there is the possibility of a higher return (riskreturn tradeoff). And a rational, riskaverse 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, riskaverse investor would be indifferent between the two assets. 2 Question 3 A riskaverse 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 σ σ Asset B has a higher expected return and...
View
Full
Document
This note was uploaded on 04/24/2011 for the course BAFI 1012 taught by Professor Michaelgangemi during the Three '10 term at Royal Melbourne Institute of Technology.
 Three '10
 MichaelGangemi

Click to edit the document details