Portfolio Management - Portfolio Management Section 1

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2. Which of the following statements about risk-averse investors is least accurate? A risk-averse investor:

  • Option : C
  • Explanation : Risk-averse investors are generally willing to invest in risky investments, if the return on the investment is sufficient to reward the investor for taking on this risk. Participants in securities markets are generally assumed to be risk-averse investors.
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3. Selected information about shares of two companies is provided below:

 ABC Corporation XYZ Corporation
Standard deviation  25%30%
Correlation of returns 0.24
Portfolio weights 40%60%

  • Option : B
  • Explanation : Portfolio standard deviation = √ (0.25)² (0.4)² + (0.3)² (0.6)² + 2 (0.24) (0.4) (0.6) (0.25) (0.3) = 0.2259.
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5. The following data is available:

Expected ReturnStandard DeviationRisk aversion coefficient
15%  27%4

  • Option : C
  • Explanation : U = E(r) – 0.5Aσ² U = 0.15 – 0.5 * 4 * 0.27² = 0.0042
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