When describing the attitude of investors towrds risk, which statement is correct? A.Investors may behave as though they are risk seekers for small investments B.For a risk-averse investor, the standard deviation of the return distribution is a relevant measure of risk C.Investors behave as though they are risk averse for investments of significant size D.All of the above

When describing the attitude of investors towrds risk, which statement is correct? A.Investors may behave as though they are risk seekers for small investments B.For a risk-averse investor, the standard deviation of the return distribution is a relevant measure of risk C.Investors behave as though they are risk averse for investments of significant size D.All of the above

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 3QE

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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 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 correctly describe characteristics of a risk averse investor? Group of answer choices A. A risk-averse investor may be willing to give up some expected return in order to be exposed to a higher level of risk. B. Given a choice, a risk-averse investor will always choose the investment with the lower level of risk when deciding between two investments offering different levels of expected return. C. More than one of the other statements is correct. D. A risk-averse investor will demand compensation in the form of higher expected returns in order to take on investments with higher risk.
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.
The calculation of an investor's Risk Aversion (A) requires us to look at that individual investor's historic behavior in his/her investing history. Why is Risk Aversion also called "price of risk"? Group of answer choices Risk Aversion measures the risk premium that the investor has required for the Capital Market Line Risk Aversion is determined by the excess return over the risk-free asset, as required by the investor Risk Aversion measures the difference in returns required by the investor in the Capital Allocation Line versus the Capital Market Line Risk Aversion measures the amount of return that the investor has required for each unit of risk taken None of the above
If an investor prefers investment with higher risk , regardless to the return then he is following a ________ strategy. a. risk-aware b. risk-neutral c. risk-averse d. risk-seeking
An investor must look not only at the over-all return of a portfolio but also the risk of that portfolio to see if the investments return compensates for the risk it takes a. it depends b. maybe c. true d.false
In a few sentences, answer the following question as completely as you can. We routinely assume that investors are “risk-averse return-seekers” (i.e., they like returns and dislike risk). If so, why do we contend that only systematic risk is important? Alternatively, why is total risk, on its own, not important to investors?
What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed
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
Give typing answer with explanation and conclusion The market risk premium: Decreases with the risk aversion of investors in the market Increases with the risk aversion of investors in the market Decreases with the egree of risk of the average potential risky investment Could be negative
Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an asset's standard deviation. The expected returns and standard deviations of the investments are as follows: Investment Expected return Standard deviation X 17% 7% Y 17% 8% Z 17% 9% a. If Sharon were risk neutral, which investment would she select? Explain why. b. If she were risk averse, which investment would she select? Why? c. If she were risk seeking, which investments would she select? Why? d. Suppose a fourth investment, W, is available. It offers an expected return of 18%,and it has a standard deviation of 9%. If Sharon is risk averse, can you say which investment she will choose? Why or why not? Are there any investments that you are certain she will not choose?