Reading 52: Portfolio Risk and Return: Part I-LOS h 习题精选 2011, allocation, different, efficient, investor

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Session 12: Portfolio Management
Reading 52: Portfolio Risk and Return: Part I

LOS h: Discuss the selection of an optimal portfolio, given an investor's utility (or risk aversion) and the capital allocation line.

 

 

The graph below combines the efficient frontier with the indifference curves for two different investors, X and Y.

Which of the following statements about the above graph is least accurate?

A) The efficient frontier line represents the portfolios that provide the highest return at each risk level.

B) Investor X is less risk-averse than Investor Y.

C) Investor X's expected return will always be less than that of Investor Y.

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Investor X has a steep indifference curve, indicating that he is risk-averse. Flatter indifference curves, such as those for Investor Y, indicate a less risk-averse investor. The other choices are true. A more risk-averse investor will likely obtain lower returns than a less risk-averse investor.

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Which of the following statements best describes risk aversion?

A) Given a choice between two assets of equal return, the investor will choose the asset with the least risk.

B) There is an indirect relationship between expected returns and expected risk.

C) The investor will always choose the asset with the least risk.

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Risk aversion is best defined as: given a choice between two assets of equal return, the investor will choose the asset with the least risk. The investor will not always choose the asset with the least risk or the asset with the least risk and least return. As well, there is a positive, not indirect, relationship between risk and return.

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According to Markowitz, an investor’s optimal portfolio is determined where the:

A) investor's lowest utility curve is tangent to the efficient frontier.

B) investor's utility curve meets the efficient frontier.

C) investor's highest utility curve is tangent to the efficient frontier.

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The optimal portfolio for an investor is determined as the point where the investor’s highest utility curve is tangent to the efficient frontier.

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The optimal portfolio in the Markowitz framework occurs when an investor achieves the diversified portfolio with the:

A) highest utility.

B) highest return.

C) lowest risk.

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The optimal portfolio in the Markowitz framework occurs when the investor achieves the diversified portfolio with the highest utility.

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The graph below combines the efficient frontier with the indifference curves for two different investors, X and Y (represented by U(X) and U(Y)). The letters A, B, C, and D represent four distinct portfolios.

Which of the following statements about the above graph is least accurate?

A) Investor X's return will always be less than that of Investor Y.

B) Portfolios A and B are both optimal portfolios.

C) Investor X would be better off moving to indifference curve U(X)1 and Portfolio C because of the higher return on that portfolio.

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Any portfolio on the efficient frontier is superior to one that is not. Thus, Investor X would not be better off with Portfolio C (this portfolio is on a lower indifference curve and has more risk.)

The other choices are correct. The optimal portfolio for each investor is the one on the highest indifference curve that is tangent to the efficient frontier. Thus, portfolios A and B are both optimal portfolios, but for different investors. In addition, Investor X has a steeper indifference curve, indicating that he is risk-averse. Flatter curves, such as those for investor Y, indicate a less risk-averse investor. As a result, X’s return will be less than Y’s.

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Which of the following statements about the efficient frontier is least accurate?

A) Portfolios falling on the efficient frontier are fully diversified.

B) The efficient frontier shows the relationship that exists between expected return and total risk in the absence of a risk-free asset.

C) Investors will want to invest in the portfolio on the efficient frontier that offers the highest rate of return.

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The optimal portfolio for each investor is the highest indifference curve that is tangent to the efficient frontier.

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Which of the following statements about risk aversion is CORRECT?

A) Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk.

B) Risk averse investors will not take on risk.

C) Risk aversion implies that the risk-return line, the CML, and the SML are downward sloping curves.

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Risk aversion implies that an investor will not assume risk unless compensated.

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The basic premise of the risk-return trade-off suggests that risk-averse individuals purchasing investments with higher non-diversifiable risk should expect to earn:

A) lower rates of return.

B) rates of return equal to the market.

C) higher rates of return.

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Investors are risk averse.  Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk.  This means that there is a positive relationship between expected returns (ER) and expected risk (Es) and the risk return line (capital market line [CML] and security market line [SML]) is upward sweeping.

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Risk aversion means that if two assets have identical expected returns, an individual will choose the asset with the:

A) lower risk level.

B) higher standard deviation.

C) shorter payback period.

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Investors are risk averse.  Given a choice between assets with equal rates of expected return, the investor will always select the asset with the lowest level of risk.  This means that there is a positive relationship between expected returns (ER) and expected risk (Es) and the risk return line (capital market line [CML] and security market line [SML]) is upward sloping.

Standard deviation is a way to quantify risk. The payback period is used to evaluate capital projects, not investment returns.

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Which of the following statements about portfolio diversification is CORRECT?

A) The efficient frontier represents individual securities.

B) As the correlation coefficient moves from +1 to zero, the potential for diversification diminishes.

C) When a risk-averse investor is confronted with two investment opportunities having the same expected return, the investor will take the opportunity with the lower risk.

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The other statements are false. The lower the correlation coefficient; the greater the potential for diversification. Efficient portfolios lie on the efficient frontier.