ps3sol - Financial Economics V 3025 Rajiv Sethi Phone 854...

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Financial Economics V 3025 Spring 2006 Rajiv Sethi 5B Lehman Phone: 854 5140 [email protected] Problem Set 3: Solutions 1. (a) \The variance of a portfolio must be at least as great as that of the asset with the smallest variance" is false. As long as the correlation coe°cient is less than 1, investors even can get a lower variance than that of either risky asset by choosing the right portfolio weights. (b) \Given a choice between two portfolios, a risk-neutral investor will always choose the one with the higher expected return" is true. Risk neutral investors judge risky prospects only by their expected rates of return (c) \Given a choice between two portfolios, a risk-averse investor will always choose the one with the lower variance" is false. Risk averse investors care about both expected return and variance. Therefore, this type of investor can’t choose a portfolio without information about expected return. We can say that if given expected returns are same, then risk averse investors will choose the one with the lower variance. (d) \Given a choice between two portfolios, a risk-seeking investor will always choose the one with the higher variance" is false. Risk seeking investors always care about both expected return and variance. Therefore, this type of investor can’t choose a portfolio without information about expected return. We can say that if given expected returns are same, then risk seeking investors will choose the one with the higher variance.
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