Risk Aversion and Question

irresolution 3 (5 points) consider your dear old grandad approaches you for investment advice. He k instantaneouslys of your great training in finance and statistics and gives the future(a) instructions Obviously, I want to maximize my returns, but since my life is now quite boring, I also enjoy a good thrill. My setoff priority is to pick the security with the highest return. After that, pick me the most quicksilver(a) investment so I toilette enjoy the thrills of holding risk. Suppose there are third securities (X, Y, and Z) to choose from next year, the economy result be in an expansion, natural, or recession state with probabilities 0. 0, 0. 20, and 0. 40 respectively. The returns (%) on the securities in these states are as follows protection X expansion = +13, usual = +9, recession = +7 guarantor Y,+1 5,+1 5,+2 aegis Z +17,+10,+2. 5. Which investment best fits your grandfathers needs? Your act Correct. in one case you see the calculations, his preferences determ ine the obvious choice. Security X. An exposure to how your choices depend on your risk preferences. Question 4 (10 points) The to a greater extent idiosyncratic risk in the return of a security, the larger the risk premium investors ordain demand.Your ca aim True False. 10. 00 Correct. You understand risk-aversion and the implied diversification by investors. 10. 00 / 10. 00 Fundamentals of risk and diversification. Question 5 (10 points) We often want to find investments that perform well when different parts of our portfolio are struggling. When considering stocks to add to the portfolio, those with a correlation closer to cipher with our existing portfolio will most effectively help us diversify. Your Answer Correct. You understand relationships and their critical role in diversification. True.Again, understanding relationships and diversification. Question 6 (10 points) As a CEO you wish to maximize the productivity of your workers. You are thinking intimately providing yo ur employees with smartness so they shag be right away available to clients and increase sales. However, you are also concerned that your employees are skilful as likely to download APS that will distract them from their work, leading them to solve games and update their social ne devilrking sites rather than focus on the Job of kind clients. To test this you randomly select 6 employees for an experiment.You provide 3 with the stark naked smart phone and the other 3 use their existing technology. The adjacent chart shows their changes in sales. Based on this sm all sample, what is the correlation among smartened and increase in sales? Hint It may help to use the spreadsheet give way COERCE to opine the correlation (Enter the answer with no more than nor less than two decimal places, and leave off the % sign. For example, if your answer is 13. 97% you should enter it as 13. 97 NOT 0. 14 nor 14) Anthony, Smartened Yes change in sales long hundred Kirk,Smartened No swap in Sales 60 Michael, Smartened No Change in Sales 150 Scarlet. , Smartened Yes Change in Sales one hundred thirty Pete, Smartened Yes Change in Sales 40 Angela, Smartened No Change in Sales 60. Answer for Question 6 You entered Your Answer 8. 03 Correct. You know how to enter/measure relationships. Calculation of correlation important to finance and Just about anything else. Question 7 (10 points) Investors generally do not like to tire out risk. Because of this, the price of an otherwise identical g everyplacenment bond relative to a corporate bond will be Your The same. Lower. Higher. Correct.You will be involuntary to pay less for something that you dislike relative to the alternative. Total Simple set of risk-aversion. Question 8 (1 5 points) Suppose your client is risk-averse but can invest in only one of the three securities, X, Y, or Z, in an uncertain world characterized as follows. nigh year the economy will be in an expansion, normal, or recession state with probabilit ies 0. 40, 0. 40, and 0. 20, respectively. The returns (%) on the three securities in these states are as follows Security X expansion = +14, normal = +10, recession = +7 Security Y +1 1, 9, +8 Security Z +13, +8, +7. . Which security can you rule out, that is, you will not suggest your client to invest in it? Your Answer Inherent 0. 00 Calculate the rudimentary statistics for all three securities and evaluate them posteriord on risk- return trade-offs. Security Z. None of the securities. 0. 00/ 15. 00 This is a real life situation that requires you to think through a bit. Question 9 (15 points) You have Just taken over as a fund manager at a brokerage firm firm. Your assistant, Thomas, is briefing you on the current portfolio and states We have too such of our portfolio in Alpha.We should probably move some of those funds into Gamma so we can achieve better diversification. Is he right? Hint Feel free to use spreadsheet statistical functions. Here is the data on all three sto cks. Assume, for convenience, that all three securities do not pay dividends. Alpha, Current Price 40 Current exercising weight 80% Next Years Price Expansion 48, commonplace 44, Recession 36 Beta, Current Price 27. 50 Current Weight 20% Next Years Price Expansion 27. 50, Normal 26, Recession 25 Gamma, Current Price 15 Current Weight 0% Next Years Price Expansion 16. 0, Normal 19. 50, Recession 12. Your Answer It depends. Yes. 15. 00 Correct. You know how to calculate relationships and to make informed portfolio management decisions. No. 15. 00/ 15. 00 A good gesture for figuring out portfolio composition given that we are into diversification. Question 10 (1 5 points) Suppose there are two mortgage bankers. Banker 1 has two $1,000,000 mortgages to sell. The borrowers get going on opposite sides of the country and face an autarkic luck of default of 5%, with the banker able to salvage 40% of the Ortega respect in case of default.Banker 2 also has two $1,000,000 mortgages to se ll, but Banker gs borrowers live on the same street, have the same Job security and income. spew differently, the fates and thus solvency of Banker gs borrowers move in lock step. They have a probability of defaulting of 5%, with the banker able to salvage 40% of the mortgage value in case of default. Both Bankers plan to sell their respective mortgages as a bundle in a mortgage-backed security (MBPS) (I. E. , as a portfolio). Which of the following is correct? Your Answer Banker 1 s MBPS has a higher judge return and more risk.Banker gs MBPS has a higher expected return and more risk. Banker 1 s MBPS has more risk, but the expected returns on both(prenominal) MBPS are the same. Banker Xis MBPS has a higher expected return and less risk. Banker gs MBPS has more risk, but the expected returns on both MBPS are the same. Correct. You can calculate, and base decisions on, risk-return trade-offs. Banker gs MBPS has a higher expected return and less risk. A local issue given the curre nt crisis requires you to both calculate and make decisions found on risk-return trade-offs.