An investor owns bond #1 that has a rate of return of 10 percent, but bond #2 has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in: Question 13 options: Risk Arbitrage Diversification Time preference
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The investor currently owns bond #1 with a 10 percent return and is considering selling it to buy bond #2, which offers an 11 percent return with equal risk. Show more…
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There is ONE risk factor, the interest rate risk factor. Investors can borrow at the risk-free rate. Portfolio (A) is well diversified with the following risk-return profile. Beta Risk Premium Portfolio (A) 0.8 5% Interest Rate Risk Factor 1 6% Risk Free rate = 4% For a portfolio that earns a positive risk-free profit, a trader would: a) Buy Portfolio (A) and short sell Interest rate risk factor, borrow at risk-free rate b) Buy Portfolio (A) and short sell Interest rate risk factor c) Short sell Portfolio (A), buy interest rate risk factor, borrow at risk-free rate d) Buy Portfolio (A), buy interest rate risk factor, borrow at risk-free rate
Akash M.
A risk-averse investor can borrow or lend at a risk-free rate of 3%. Which of the following risky portfolios would the investor combine with the risk-free asset to maximise their utility? a. Portfolio C: Expected return = 6%, Standard Deviation = 10% b. Portfolio A: Expected return = 4%, Standard Deviation = 3% c. More information is required d. Portfolio B: Expected return = 5%, Standard Deviation = 7% Which of the following is a benefit of diversification? a. Systematic risk is generally reduced as you add more stocks to your portfolio b. All choices are TRUE c. Total risk is generally reduced as you add more stocks to your portfolio d. Returns generally increase as you add more stocks to your portfolio Which of the following asset allocations would be most appropriate for an investor who is 28 years old and works full-time? a. Listed Equity = 50%, Fixed Income = 20%, Cash = 5%, Property = 25% b. Listed Equity = 10%, Fixed Income = 5%, Cash = 80%, Property = 5% c. Listed Equity = 100%, Fixed Income = 0%, Cash = 0%, Property = 0% d. Listed Equity = 20%, Fixed Income = 40%, Cash = 20%, Property = 20% Four assets, A, B, C and D have the following risk and return. Return(A) = 5%, Risk(A) = 5%, Return(B) = 8%, Risk(B) = 5%, Return(C) = 5%, Risk(C) = 4%, Return(D) = 8%, Risk(D) = 6%. Which of the following statements about preferences for a risk-averse investor are correct? a. B is preferred to A, B is preferred to D, C is preferred to A b. B is preferred to D, C is preferred to A, D is preferred to C c. B is preferred to A, C is preferred to D, D is preferred to A d. B is preferred to C, B is preferred to D, C is preferred to A Consider three assets, HVN, QAN and RIO. All three assets have the same correlation with each other of 0.1. HVN has an expected return of 5% and a standard deviation of 6%. QAN has an expected return of 7% and a standard deviation of 8%. RIO has an expected return of 8% and a standard deviation of 10%. Which of the following combinations of stocks will provide the best risk-return outcome for a risk-averse investor? a. RIO and HVN b. RIO c. RIO and QAN d. RIO, QAN and HVN
Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination Fraction of Portfolio in Diversified Stocks Average Annual Return Standard Deviation of Portfolio Return (Risk) (Percent) (Percent) (Percent) A 0 1.50 0 B 25 3.00 5 C 50 4.50 10 D 75 6.00 15 E 100 7.50 20 There is a relationship between the risk of Caroline's portfolio and its average annual return. Suppose Caroline currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase bonds Sell some of her bonds and use the proceeds to purchase stocks Place the entirety of her portfolio in bonds Accept a lower average annual rate of return The table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, such as a portfolio's return, stays within two standard deviations of its average approximately 95% of the time. Suppose Caroline modifies her portfolio to contain 25% diversified stocks and 75% risk-free government bonds; that is, she chooses combination B. The average annual return for this type of portfolio is 3%, but given the standard deviation of 5%, the returns will typically (about 95% of the time) vary from a gain of to a loss of .
Sri K.
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