HW #5

Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________.

3%

Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit after one year would be _________.

$7,000 =(20%*60%)+(5%*40%) = 14% risky return =14% * $50,000 = $7,000

The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?

.6

You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?

15y + 5(1 - y) = 11; y = 60%; .60(10,000) = $6,000

The geometric average of −15%, 35%, and 40% is _________.

17.12%

You invest $2,400 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 18% and a standard deviation of 25% and a Treasury bill with a rate of return of 8%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 13%.

52% 13% = Standard deviation of risky assets*Weight of risky assets(Standard deviation of Treasury bill=0%) 0.13=0.25*weight of risky asset weight of risky asset=(0.13/0.25) =52%

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?

6%

The geometric average of −13%, 15%, and 20% is _________.

6.28%

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________.

capital allocation line

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________. capital allocation line indifference curve investor's utility line security market line

capital allocation line

Assuming no change in tastes, that is, an unchanged risk aversion, investors perceiving higher risk will demand a higher risk premium to hold the same portfolio they held before. If we assume that the risk-free rate is unaffected, the increase in the risk premium would require a ________ expected rate of return in the equity market. Higher/lower

Higher

The ______ measure of returns ignores compounding. geometric average arithmetic average IRR dollar-weighted

arithmetic average

The excess return is the _________. rate of return that can be earned with certainty rate of return in excess of the Treasury-bill rate rate of return to risk aversion index return

rate of return in excess of the Treasury-bill rate

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______. is normally risk neutral requires a risk premium to take on the risk knows he or she will not lose money knows the outcomes at the beginning of the holding period

requires a risk premium to take on the risk

The market risk premium is defined as __________. the difference between the return on an index fund and the return on Treasury bills the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index the difference between the return on the risky asset with the lowest returns and the return on Treasury bills the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

the difference between the return on an index fund and the return on Treasury bills

The complete portfolio refers to the investment in _________. the risk-free asset the risky portfolio the risk-free asset and the risky portfolio combined the risky portfolio and the index

the risk-free asset and the risky portfolio combined

Which measure of downside risk predicts the worst loss that will be suffered with a given probability? standard deviation variance value at risk Sharpe ratio

value at risk