5) Which of the following statement(s) is(are) false regarding the selection of a portfolio from those that lie on the capital allocation line? 1.I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. 2.II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. 3.III) Investors choose the portfolio that maximizes their expected utility. A) I only B) II only C) III only D) I and III E) II and III Justify the correct answe

5) Which of the following statement(s) is(are) false regarding the selection of a portfolio from those that lie on the capital allocation line? 1.I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. 2.II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. 3.III) Investors choose the portfolio that maximizes their expected utility. A) I only B) II only C) III only D) I and III E) II and III Justify the correct answe

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 4MC: You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the...

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You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: d. Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Dont worry about specific values when constructing the graphmerely illustrate how things look with reasonable data.
Which of the following is a false statement of the market price of risk found in the Capital Market Line? a) The incremental risk divided by the incremental expected return. b) Indicates the additional expected return that the market demands for an increase in a portfolios risk. c) The equilibrium price of risk in the capital market. d) The slope of the capital market line.
what are the challenges faced by an investment advisor in managing investor expectations in volatile market conditions? Additionally, can you validate the statement: According to Harry Markowitz, the risk of well-diversified portfolio is less than the risk of the candidate used in the portfolio.
What is theCapital Market Line (CML), how is it related toefficient portfolios, and how does it interface withan investor’s indifference curve to determine the nvestor’s optimal portfolio? Is it possible that tworational investors could agree as to the specifications of the Capital Market Line, but one wouldhold a portfolio heavily weighted with Treasurysecurities while the other held only risky stocksbought on margin?
7) If an investor wants to form a portfolio that lies to the right of the optimal risky portfolio on the capital allocation line must A) lend some of her money at the risk-free rate. B) borrow some money at the risk-free rate, invest in the optimal risky portfolio, and invest only in risky securities C) invest only in risky securities. D) borrow some money at the risk-free rate. E) Such a portfolio cannot be formed. Choose the correct answer and provide explanation.
Determine whether each of the statements (a)–(c) is True or False. A) Underestimation of the market risk premium results in the underestimation of the cost of capital for a project and in turn increases the likelihood that a negative NPV project is falsely accepted. B) The CAPM beta of a security measures the variability of the return of the security in isolation. C) If an investor holds a well-diversified portfolio, the type of risk left in such a portfolio is primarily the idiosyncratic risk. Answer: a) b) c)
Which of the following choices best completes the following statement? Explain. An investor with a higher degree of risk aversion, compared to one with a lower degree, will most prefer investment portfoliosa. with higher risk premiums.b. that are riskier (with higher standard deviations).c. with lower Sharpe ratios.d. with higher Sharpe ratios.
Which of the following statements is CORRECT? a. Portfolio diversification reduces the variability of returns on an individual stock. b. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events. c. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. d. A stock with a beta of −1.0 has zero market risk if held in a 1-stock portfolio. e. When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.
Which of the following regarding the investor sentiment theory of the closed end fund puzzle is FALSE? a) Investors in closed end funds are not as important an ownership group in the assets of the funds’ investment portfolios. b) The closed end fund is riskier than the underlying portfolio. c) Arbitrageurs are subject to limits to arbitrage. d) The noise trader risk is diversifiable.
In a seminal article on portfolio theory, Markowitz (1952) illustrated that investors are not compensated for taking on firm specific or idiosyncratic risk; however, they are compensated for taking market or systemic risk. Use your understanding of the Capital Asset Pricing Model (CAPM), statistical concepts such as standard deviation and variance, and our ideas about market efficiency and indicate whether you believe that this is a good theory. Include at least two citations that support your response.
Which of the following statements are true? Explain.a. A lower allocation to the risky portfolio reduces the Sharpe (reward-to-volatility) ratio.b. The higher the borrowing rate, the lower the Sharpe ratios of levered portfolios.c. With a fixed risk-free rate, doubling the expected return and standard deviation of the risky portfolio will double the Sharpe ratio.d. Holding constant the risk premium of the risky portfolio, a higher risk-free rate will increase the Sharpe ratio of investments with a positive allocation to the risky asset.
Assume a utility function of ? = ?[?] − 1 ?? 2. Which statement(s) is/are correct about investors with this utility function? [I] An investor with a higher degree of risk aversion chooses the optimal portfolio with a higher risk premium [II] An investor with a higher degree of risk aversion chooses the optimal portfolio with lower risk [III] An investor with a higher degree of risk aversion chooses the optimal portfolio with a higher sharpe ratio [IV] The extent to which the investor dislikes risk is captured by ? 2 A. [II] only B. [I], [II] only C. [III] , [IV] only D. [II], [IV] only E. [I], [II], [III] only