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- You are given the following data about Asset A and Asset B.
Asset A Asset B
Expected returns 8.6% 7.9%
Standard Deviation 3.8% 4.6%
Assuming that an investor is to choose between Asset A or Asset B, explain which asset
a rational investor will choose.
- c) With the use of a diagram, explain why an investor will always choose a point on the
SML line.
Step by step
Solved in 2 steps with 1 images
- Hi, An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation of 5.5%, Asset U with an expected return of 8.8% and a standard deviation of 5.5%, and Asset B with an expected return of 8.8% and a standard deviation of 6.5%. Which one should the investor prefer? Thank youAssume that you have obtained the following information for Asset A: Rate of Return Probability 5.5% 25% 7.25% 55% 11% 20% Compute the expected rate of return for Asset A, using the information provided in thechart above Assume that the standard deviation of the expected returns for Asset A is 1.87%. With information and the expected rate of return that you calculated for Asset A in Part A of this problem, compute the co-efficient of variation for Asset A.Consider two different assets. Asset A has a mean expected return of 6% with a standard deviation of 22%. Asset B has a standard deviation of returns of 32%. What should be the mean expected return on asset B for a rational investor to be indifferent about these two investments? Answer only if you are 100% sure, other wise i will report your answer.
- Assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 18.7%; and that the coefficient of variation, CV, is 1.88, answer the following questions: a. Find the standard deviation of returns, sigma Subscript rσr. b. Calculate the range of expected return outcomes associated with the following probabilities of occurrence: (1) 68%, (2) 95%, (3) 99%.Course: FinanceAs a great investor, you are interested in 3 assets to invest: A, B and C. A financial advisor tells you that the returns on the assets are independent of each other, and you are given the following data: Asset A B C E(Ri) 0.05 0.035 0.06 Variance 0.0015 0 0.008 You have not yet analyzed what your degree of risk aversion (A) is, but you know that your utility function behaves as follows: U[ E(Rp)] = E(Rp) - 0.5 * A * Variance. (See attached image for a better understanding) You are asked to:(a) Find the optimal portfolio with these 3 assets {called wA, wB and wC}.b) Calculate the expected return and risk of the optimal portfolio for the following degrees of risk aversion (A):(i) A = 5(ii) A = 10(iii) A = 16 Please ASAPGive typing answer with explanation and conclusion The additional compensation that investors require to take on higher risk investments is the a. standard deviation. b. coefficient variation. c. Sharpe ratio. d. risk premium. e. risk aversion.
- Asset M Asset N j P?? Return, ?? P?? Return, ?? 1 0.25 10% 0.15 10% 2 0.25 -6% 0.30 8% 3 0.15 2% 0.20 15% 4 0.20 5% 0.05 0% 5 0.15 20% 0.30 -2% Calculate the expected value of return, ?̅, for each of the two assets. Which provides the largest expected return? Calculate the standard deviation, ?? , for each of the two assets’ returns. Which appears to have the greatest risk? Calculate the portfolio expected return if you invest 27% of your wealth in M and 73% inN, of your total wealth of $40,000.Suppose the average return on Asset A is 6.6 percent and the standard deviation is 8.6 percent and the average return and standard deviation on Asset B are 3.8 percent and 3.2 percent, respectively. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions. a. What is the probability that in any given year, the return on Asset A will be greater than 11 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the probability that in any given year, the return on Asset B will be greater than 11 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. In a particular year, the return on Asset A was −4.25 percent. How likely is it that such a low return will recur at some point in the future? (Do…Suppose you are considering investing your entire portfolio in three assets A, B and C. You expect that after you invest, four possible mutually exclusive scenarios will occur, with associated returns (in %) for each of the three assets as listed below. The probability of each scenario is given below (Attached image). Find the expected returns and standard deviations of Asset A, B & C. (HINT: the expected return is given by the probability-weighted sum of returns in each scenario. The expected standard deviation is given by the square root of the probability-weighted sum of squared deviations from the expected return.) Is there any reason to invest in Asset A given its low expected return and high standard deviation?
- assume that an individual investor wants to select one market segment for a new investment. a forecast shows stable to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). what is the preferred market segment for the investor, and what is the expected return percentage?Consider the following investments: Investment Expected return Standard deviationA 5% 10%B 7% 11%C 6% 12%D 6% 10% Which would you prefer between the following pairs:a) A and Db) B and Cc) C and DSharon 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?