Assignment01 - 4 Consider a risky portfolio A with an...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
EC3333 Financial Economics I Tutorial 1 (Mon 30 Aug - Friday 3 Sep ) No need to submit 1. Suppose an investor can borrow at the risk free rate r f . Derive the formula for rate of return r c when he/she borrows money to invest y · M, y > 1 in the risky asset whose rate of return is r p . M is the investor’s initial budget. 2. Which of the following statements is (are) correct? I) Risk-averse investors reject investments that are fair games. II) Risk-neutral investors judge risky investments only by the expected returns. III) Risk-averse investors judge investments only by their riskiness. IV) Risk-loving investors will not engage in fair games. 3. A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6 percent. An investor has the following utility function: U = E ( r ) - ( A/ 2) σ 2 . Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset? Is the investor risk averse?
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 4. Consider a risky portfolio, A, with an expected rate of return of 0.15 and a standard deviation of 0.15, that lies on a given indifference curve. Which one of the following portfolios might lie on the same indifference curve? A. E(r) = 0.15; Standard deviation = 0.20 B. E(r) = 0.15; Standard deviation = 0.10 C. E(r) = 0.10; Standard deviation = 0.10 D. E(r) = 0.20; Standard deviation = 0.15 E. E(r) = 0.10; Standard deviation = 0.20 5. You invest $100 in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15 and a T-bill with a rate of return of 0.05. What is the slope of the Capital Allocation Line formed with the risky asset and the risk-free asset? Suppose A = 4, what the optimal amount of investment on the risky asset? Does the investor have to leverage? How about when A = 1? 1...
View Full Document

This note was uploaded on 10/30/2011 for the course ECON EC3333 taught by Professor Lu during the Spring '11 term at National University of Singapore.

Ask a homework question - tutors are online