III. The higher the standard deviation, the less certain the rate of return in any one given year.
Problem 1: Jonathon Barrs is a manager for Easy Manufacturing, LLC. He wishes to evaluate three possible investments. These investments are for the purchase of new machine tools from Germany, Japan, and a local US manufacturer. The firm earns 10% on its investments and they have a risk index of 5%. The chart below lays out the expected return and expected risks of the three projects.
An investor would invest in a security for the return. However that return comes with a premium, the Risk. The higher the risk an investor is willing to take the higher the returns would
Standard Deviation of Mean= 0.4762Standard Deviation of Median= 0.7539The standard deviation of the Mean is smaller, which means all of the data points will tend to be very close to the Mean. The Median with a larger Standard Deviation will tend to have data points spread out over a large range of values. Since the Mean has the smaller value of the Standard Deviations, it has the least variability.
a) Apply the coefficient-of-variation decision criterion to these alternatives to find out which is preferred by the angel investor, assuming that he/she is risk-averse.
6. Do bonds reduce the overall risk of an investment portfolio? Let x be a random variable representing annual percent return for the Vanguard Total Stock Index (all Stocks). Let y be a random variable representing annual return for the Vanguard Balanced Index (60% stock and 40% bond). For the past several years, assume the following data. Compute .
The lower the risk that is associated with an investment, that investment usually has a potential for lower returns. Conversely, if there are high levels of risk associated with an investment, and in turn a potential for a higher return.
From the Risk VS Return graph, we can see that for any given return, the portfolio with both REITs and commodities would yield the lowest risk. Also, the portfolio with only commodities would
d. What would be the investor 's certainty equivalent return for the optimally chosen combination? 2. Consider an investor who has an asset allocation of 50% in equities and the rest in T-Bills. Suppose the expected rate of return on equities is 10%/year and the standard deviation of the return on equities is 15%/year. T-Bills earn 6%/year. a. What is the implied risk aversion coefficient of the investor?
Try to work out this question by assuming that Beta’s position had been 99% of equity funds invested in the index fund, and 1% in a riskless money market account. Imagine that you can switch from the money market account to CREIT, BG, or the index fund. Think about the condition for Sarah to be indifferent between switching to CREIT (or BG) and switching to the index.