To think critically about: The representation of the Variable (A) in the Utility Formula among the given terms such as Investor’s return of investment; Investor’s aversion to risk; Certainty equivalent rate of portfolio; preference for one unit of return per four units of risk. Introduction: Risk averse investor: There is strong reality in the market that a higher risk gives more returns than a lower risk. Sometimes, some investors prefer investing in something which gives lower return and its risk are known instead of getting higher returns for unknown risks. A person with this type of thought is known risk averse investor.

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Chapter 6, Problem 3CP

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To think critically about: The representation of the Variable (A) in the Utility Formula among the given terms such as Investor’s return of investment; Investor’s aversion to risk; Certainty equivalent rate of portfolio; preference for one unit of return per four units of risk.

Introduction:

Risk averse investor: There is strong reality in the market that a higher risk gives more returns than a lower risk. Sometimes, some investors prefer investing in something which gives lower return and its risk are known instead of getting higher returns for unknown risks. A person with this type of thought is known risk averse investor.

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Consider the following information for four portfolios, the market, and the risk-free rate (RFR): Portfolio Return Beta SD A1 0.15 1.25 0.182 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio. a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02 b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014 c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014 d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14 e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14

a. Compute the expected rate of return on investment i given the following information: the market risk premium is 5%; Rf = 6%; βi = 1.2. b. Compute E(RM).

An investor wishes to contruct a portfolio consisting of security 1 and security 2. the expected return on the two securities are E(R1) = 0.08 And E(R2) = 0.12 and the standard deviation 1 = 0.04 and Standard deviation 2 = 0.06. the correlation coefficient between thier returns is P1,2 = -0.5. Investor is free to choose the investment proportions W1 And W2 only to requirment that w1+w2=1 and both w1 and w2 are positive.There is no limit to the number of portfolios that meet thses requirements, since there is no limit to the number of proportions that sum to 1. Therefore a representative selection of values is considered w1: 0, 0.2, 0.4, 0.6, 0.8, and 1