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Answers: Risk Aversion and Security

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Assignment 7
The due date for this quiz is Mon 26 Aug 2013 6:00 AM PDT (UTC -0700).
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Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. This assignment covers Statistics as related to finance. Refer to Note on Review of Statistics before …show more content…

For two otherwise identical corporate bonds, the one with more idiosyncratic risk should have a price that is
Higher.
The same.
Lower.

Answer: Higher
Question 8
(15 points) Suppose your client is risk-averse but can invest in only one of the three securities, X, Y, or Z, in an uncertain world characterized as follows. Next year the economy will be in an expansion, normal, or recession state with probabilities 0.40, 0.40, and 0.20, respectively. The returns (%) on the three securities in these states are as follows: Security X {expansion = +14, normal = +10, recession = +7}; Security Y {+11, +9, +8}; Security Z {+13, +8, +7.5}. Which security can you rule out, that is, you will not advise your client to invest in it?
None of the securities.
Security X.
Security Y.
Security Z.

Answer: Security Y
Question 9
(15 points) You have just taken over as a fund manager at a brokerage firm. Your assistant, Thomas, is briefing you on the current portfolio and states "We have too much of our portfolio in Alpha. We should

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