Scribd
Upload
27 views4 pages

Exercise chapter6 lẻ

This document contains sample questions and solutions related to portfolio optimization and the capital asset pricing model. It provides the utility formula used to calculate investor utility based on expected return and risk aversion. Several questions are answered that involve calculating the expected return, standard deviation, and optimal proportions for portfolios combining risky and risk-free assets, based on given investor risk aversion levels. The key concept covered is that the utility formula can be used to determine the optimal portfolio allocation to maximize utility for an investor with a specified degree of risk aversion.

Uploaded by

Anh Lê Thị Lan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
27 views4 pages

Exercise chapter6 lẻ

This document contains sample questions and solutions related to portfolio optimization and the capital asset pricing model. It provides the utility formula used to calculate investor utility based on expected return and risk aversion. Several questions are answered that involve calculating the expected return, standard deviation, and optimal proportions for portfolios combining risky and risk-free assets, based on given investor risk aversion levels. The key concept covered is that the utility formula can be used to determine the optimal portfolio allocation to maximize utility for an investor with a specified degree of risk aversion.

Uploaded by

Anh Lê Thị Lan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

CHAPTER 6

Ex 5. Consider a portfolio that offers an expected rate of return of 12% and a standard
deviation of 18%. T-bills offer a risk-free 7% rate of return. What is the maximum level
of risk aversion for which the risky portfolio is still preferred to bills?
σ of T-bills = 0%.
σ of risky portfolio = 18%
E(r) of T-bills = 7%.
E(r) of risky portfolio = 12%

Utility for T-bills is: U = E(r) –


0.5Aσ2 = 0.07 - 0.5A(0)2 = 0.07
Utility for the risky portfolio: U =
2 2
E(r) – 0.5Aσ = 0.12 - 0.5A(0.18)
1
Utility for T-bills is: U1 = E(r1) – Aσ2
2
1
= 0,07 – A(0)2 = 0,07
2
1
Utility for the risky portfolio: U2 = E(r2) – Aσ2
2
1
= 0,12 – A(0,18)2
2

= 0,12 – 0,0162A
Equating U1 and U2 to solve for A:
0,12 – 0,0162A = 0,07
 A = 3,086
 The risk-aversion (A) must be less than 3,086 for the risky portfolio to be preferred to
T-bills.
Ex 13.
Risky portfolio T-bills
Expected return 18% 8%
Standard deviation 28% 0%
Weight 70% 30%

E(rC) = y . E ( r p ) + ( 1− y ) . r f =¿0,7.0,18 + 0,3.0,08 = 0,15 = 15%


σ C = y . σ p=¿ 0,7.0,28 = 0,196 = 19,6%

Ex 15. What is the reward-to-variability ratio (S) of your portfolio? Your client’s?
The reward-to-variability ratio of fund is
E ( r p )−r f 0,18−0,08
= =0,357=35,7 %
σp 0,28

The reward-to-variability ratio of clients is


E ( r c )−r f 0,15−0,08
= =0,357=35,7 %
σc 0 ,196

Ex 17. Suppose that your client decides to invest in your portfolio a proportion y of the
total investment budget so that the overall portfolio will have an expected rate of return
of 16%.
a. What is the proportion y ?
E ( r c ) = y . E ( r p ) + (1− y ) .r f =0,16

0,16−r f 0,16−0,08
=> y =
E ( r p )−r f
=
0,18−0,08
= 0,8 = 80%

b. What are your client’s investment proportions in your three stocks and the T-bill fund?
With 80 percent invested in p, we have
0,08.0,27 = 0,0216 = 21.6% in Stock A,
0,08.0,33 = 0,264 = 26.4% in Stock B,
0,08.0,4 = 0,032 = 32% in Stock C.
=> Client’s investment proportions in T-bills is 20%.
c. What is the standard deviation of the rate of return on your client’s portfolio?
σ C = y . σ p=¿ 0,8.0,28 = 0,224 = 22,4%
Ex 19. Your client’s degree of risk aversion is A = 3.5.
a. What proportion, y, of the total investment should be invested in your fund?
E ( r p ) −r f 0,18−0,08
y= 2
= = 0,3644 = 36,44%
Aσ p 3,5. 0,282

b. What is the expected value and standard deviation of the rate of return on your client’s
optimized portfolio?
E ( r c ) = y . E ( r p ) + (1− y ) .r f =0,3644 . 0,18+0,6356 . 0,08=0,1164=11,64 %

σ C = y . σ p=¿ 0,3644.0,28 = 0,102 = 10,2%

CFA 1. On the basis of the utility formula above, which investment would you select if
you were risk averse with A = 4?
Investment Expected Standard deviation, Risk averse
return, E(r) σ
1 0,12 0,3 -0,06
2 0,15 0,5 -0,35
3 0,21 0,16 0,1588
4 0,24 0,21 0,1518

1
Utility for each investment: U = E(r) – Aσ2
2

We choose the investment with the highest utility value, investment 3.


CFA 3. The variable (A) in the utility formula represents the:
a. investor’s return requirement.
b. investor’s aversion to risk.
c. certainty equivalent rate of the portfolio.
d. preference for one unit of return per four units of risk.
=> b
CFA 5. Which point designates the optimal portfolio of risky assets?
=> Point E
CFA 7. The change from a straight to a kinked capital allocation line is a result of the:
a. Reward-to-volatility ratio increasing.
b. Borrowing rate exceeding the lending rate.
c. Investor’s risk tolerance decreasing.
d. Increase in the portfolio proportion of the risk-free asset.
=> b

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy