Question 1. If all agents are mean-variance optimizers and have the same informa

Question

Question 1. If all agents are mean-variance optimizers and have the same information but different levels of risk aversion, then the optimal portfolio of each will consist of the same portfolio D a different amount in risky vs risk free assets, but the same composition of risky assets the same amount in risky vs risk free assets, but a different composition of the risky assets D a different amount in risky vs risk free assets and a different composition of the risky assets Question 2. In the CAPM, what must be the beta of a portfolio with E[r1-18%, if rf-6% and ErAM] = 14%. 14 18 18 14 1.5 Question 3. All other things held equal, if the yield of a bond is increased, the price of the bond goes down O stays the same D goes up is indeterminate

Explanation / Answer

1.

D

2.

C

Working note:

18% = 6% + Beta*(14%-6%)

Beta = (18%-6%)/(14%-6%)

Beta = 1.5

3.

A

There is an inverse relationship between the price and yield of the bond. So, increase in yield, will cause decrease in the price of the bond.

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