The following utility function of a complete portfolio (C) is provided. U = E(rc) - 0.5Aoz...
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The following utility function of a complete portfolio (C) is provided. U = E(rc) - 0.5Aoz You can invest in T-Bill with a safe return of 5%. Alternatively, three risky portfolios are available for you to choose. (a) (b) (c) (d) (e) Portfolio Low Risk Medium Risk High Risk Expected return Standard Deviation 7% 9% 13% 5% 10% 20% What is the risk premium of each portfolio? Is there an optimal portfolio? Explain your reasoning. [20 marks] Suppose the degrees of risk aversion A are 2, 3, and 6, and that you want to choose a utility maximising point across the three risky portfolios. What is the utility score of each portfolio? Based on the utility scores, which alternative portfolio would you choose? Why? [20 marks] Assuming that an optimal risky portfolio is now available with the following information. E (rp) = 18% Op = = 22% Calculate the expected returns, standard deviations, and utility levels for various positions in risky assets (0, 0.2, 0.4, 0.6, 0.8 and 1.0) for an investor with risk aversion A = 4. The risk-free rate is 7%. Determine the optimal complete portfolio. [20 marks] Use the utility maximising formula to find the optimal complete portfolio. Calculate the expected return, standard deviation, and the reward-to-variability for the complete portfolio. Verify that the reward-to-variability of the complete portfolio is equivalent to that of optimal portfolio. [20 marks] Plot the indifference curve and capital allocation line. Locate the optimal complete portfolio on the same graph. [20 marks] The following utility function of a complete portfolio (C) is provided. U = E(rc) - 0.5Aoz You can invest in T-Bill with a safe return of 5%. Alternatively, three risky portfolios are available for you to choose. (a) (b) (c) (d) (e) Portfolio Low Risk Medium Risk High Risk Expected return Standard Deviation 7% 9% 13% 5% 10% 20% What is the risk premium of each portfolio? Is there an optimal portfolio? Explain your reasoning. [20 marks] Suppose the degrees of risk aversion A are 2, 3, and 6, and that you want to choose a utility maximising point across the three risky portfolios. What is the utility score of each portfolio? Based on the utility scores, which alternative portfolio would you choose? Why? [20 marks] Assuming that an optimal risky portfolio is now available with the following information. E (rp) = 18% Op = = 22% Calculate the expected returns, standard deviations, and utility levels for various positions in risky assets (0, 0.2, 0.4, 0.6, 0.8 and 1.0) for an investor with risk aversion A = 4. The risk-free rate is 7%. Determine the optimal complete portfolio. [20 marks] Use the utility maximising formula to find the optimal complete portfolio. Calculate the expected return, standard deviation, and the reward-to-variability for the complete portfolio. Verify that the reward-to-variability of the complete portfolio is equivalent to that of optimal portfolio. [20 marks] Plot the indifference curve and capital allocation line. Locate the optimal complete portfolio on the same graph. [20 marks]
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Answer rating: 100% (QA)
a Risk premium Expected return Risk free return Low risk 7 5 2 Medium risk 9 5 ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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