Question 12 0 / 0.5 points ? If an investor borrow at risk-free rate of 3.5% and

Question

Question 12 0 / 0.5 points ? If an investor borrow at risk-free rate of 3.5% and invests 120% of the funds (100% of her own funds and 20% of borrowed funds at risk-free rate) in a risky asset with an expected rate of return of 13% and a standard deviation of 24%. Her new portfolio's expected rate of return and standard deviation are and espectively a) 1396; 24% b) 15.85%; 31.2% c) 11.1%: 19.2% d) 14.9%:28.8% e) 17.75%; 36% Question 13 0 0.5 points In utility function U = E( 0.5??. A is a measure of investors' degree of risk aversion. Which of the following statements is incorrect? a) For a risk-averse investor, A is greater than O. b) For a risk-neutral investor, A equals to zero c) For a risk-averse investor, A could be zero or positive. d) For a risk lover, A is less than zero oe) Risk-neutral investors only care about returns of investments but not risks.

Explanation / Answer

As the investor borrows 20% and puts in 100% of his/her own money into the risky asset, portfolio weight of the risky asset becomes 1.2 [100+20/100]. RIsk-Free Rate = 3.5 %, Risky Asset Return = 13 % and Standard Deviation of Risky Asset = 24 %

Therefore, portfolio return = risk-free rate + portfolio weight x (risky asset return - risk-free rate) = 3.5 + 1.2 x (13 - 3.5) = 14.9 % and portfolio standard deviation = portfolio weight x risky asset standard deviation = 1.2 x 24 = 28.8 %

Therefore, the correct option is (d).

NOTE: Pleas raise a separate query for the solution to the second unrelated question.

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