Investments

Which of the following statements regarding risk-averse investors is true?

• A) They only care about the rate of return.

• B) They accept investments that are fair games.

• C) They only accept risky investments that offer risk premiums over the risk-free rate.

• D) They are willing to accept lower returns and high risk.

• E) A and B.

Which of the following statements is (are) true?

I) Risk-averse investors reject investments that are fair games.

II) Risk-neutral investors judge risky investments only by the expected returns.

III) Risk-averse investors judge investments only by their riskiness.

IV) Risk-loving investors will not engage in fair games.

• A) I only

• B) II only

• C) I and II only

• D) II and III only

• E) II, III, and IV only

In the mean-standard deviation graph an indifference curve has a ________ slope.

• A) negative

• B) zero

• C) positive

• D) northeast

• E) cannot be determined

In the mean-standard deviation graph, which one of the following statements is true regarding the indifference curve of a risk-averse investor?

• A) It is the locus of portfolios that have the same expected rates of return and different standard deviations.

• B) It is the locus of portfolios that have the same standard deviations and different rates of return.

• C) It is the locus of portfolios that offer the same utility according to returns and standard deviations.

• D) It connects portfolios that offer increasing utilities according to returns and standard deviations.

• E) none of the above.

In a return-standard deviation space, which of the following statements is (are) true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) An investor's own indifference curves might intersect.

I) An investor's own indifference curves might intersect.

II) Indifference curves have negative slopes.

III) In a set of indifference curves, the highest offers the greatest utility.

IV) Indifference curves of two investors might intersect.

• A) I and II only

• B) II and III only

• C) I and IV only

• D) III and IV only

• E) none of the above

Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,

• A) for the same risk, David requires a higher rate of return than Elias.

• B) for the same return, Elias tolerates higher risk than David.

• C) for the same risk, Elias requires a lower rate of return than David.

• D) for the same return, David tolerates higher risk than Elias.

• E) cannot be determined.

When an investment advisor attempts to determine an investor's risk tolerance, which factor would they be least likely to assess?

• A) the investor's prior investing experience

• B) the investor's degree of financial security

• C) the investor's tendency to make risky or conservative choices

• D) the level of return the investor prefers

• E) the investor's feeling about loss

To maximize her expected utility, she would choose the asset with an expected rate of return of _______ and a standard deviation of ________, respectively.

• A) 12%; 20%

• B) 10%; 15%

• C) 10%; 10%

• D) 8%; 10%

• E) none of the above

To maximize her expected utility, which one of the following investment alternatives would she choose?

• A) A portfolio that pays 10 percent with a 60 percent probability or 5 percent with 40 percent probability.

• B) A portfolio that pays 10 percent with 40 percent probability or 5 percent with a 60 percent probability.

• C) A portfolio that pays 12 percent with 60 percent probability or 5 percent with 40 percent probability.

• D) A portfolio that pays 12 percent with 40 percent probability or 5 percent with 60 percent probability.

• E) none of the above.

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6 percent. An investor has the following utility function: U = E(r) - (A/2)s2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

• A) 5

• B) 6

• C) 7

• D) 8

• E) none of the above