In the following graph, the risk and return points are marked as follows: Point
ID: 2775625 • Letter: I
Question
In the following graph, the risk and return points are marked as follows:
Point
Return
Risk
A
15%
10%
B
11%
10%
C
15%
30%
D
25%
30%
F
4%
0%
G
10%
30%
P
16%
17%
Answer the following questions with reference to the points plotted on the graph and explain your answers. The investor is choosing one portfolio on the graph.
Which of the points is not achievable? Explain.
Which of the portfolios will not be chosen by a rational, risk-averse investor? Explain.
Which of the portfolios is most suitable for a risk-neutral investor? Explain.
Gold (point G) is on the inefficient portion of the feasible set. Nonetheless, gold is owned by many rational investors as part of a larger portfolio. Why?
Point
Return
Risk
A
15%
10%
B
11%
10%
C
15%
30%
D
25%
30%
F
4%
0%
G
10%
30%
P
16%
17%
Explanation / Answer
Point A is not achievable because the with less risk of only 10%, an investor cannot achieve 15% return. Always, higher the risk the investor takes, higher the returns.
A Risk averse investor can choose point G, since it is treasury bill giving 4% with no risk.
A risk neutral investor can choose B and P, since it is neither risk averse nor too risky. Its risk is between 10-20%
Gold is apart of investor portfolio has a hedge against potential corrections in the equity markets
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