Portfolio Management MCQ - Portfolio Management Section 1

1 You are advising three clients of whom Eliyahu Goldratt is the most riskaverse. According to the utility theory, the indifference curve for Goldratt will most likely be the one with the:

The most risk-averse investor has the indifference curve with the greatest slope.

2 Which of the following statements about risk-averse investors is least accurate? A risk-averse investor:

Risk-averse investors are generally willing to invest in risky investments, if the return on the investment is sufficient to reward the investor for taking on this risk. Participants in securities markets are generally assumed to be risk-averse investors.

3 Selected information about shares of two companies is provided below:

	ABC Corporation	XYZ Corporation
Standard deviation	25%	30%
Correlation of returns	0.24
Portfolio weights	40%	60%

The standard deviation of returns of the portfolio formed with these two stocks is closest to:

Portfolio standard deviation = √ (0.25)² (0.4)² + (0.3)² (0.6)² + 2 (0.24) (0.4) (0.6) (0.25) (0.3) = 0.2259.

4 An analyst studies an investment portfolio with stocks of Company ABC and Company JKL. He wishes to compute the correlation of returns between the stocks. However, the only bits of information available include the following data.

Stock	Standard Deviation	Portfolio Weights
ABC	36%	40%
JKL	27%	60%

The standard deviation of the returns for the portfolio is 30%. Thecorrelation coefficient for the returns is closest to:<

5 The following data is available:

Expected Return	Standard Deviation	Risk aversion coefficient
15%	27%	4

The utility of this investment is closest to:

U = E(r) – 0.5Aσ² U = 0.15 – 0.5 * 4 * 0.27² = 0.0042